M ARLBOROUGH B USINESS I NNOVATION S UMMIT Showcasing Marlborough as a Center for Key Industry...

MARLBOROUGH BUSINESS INNOVATION SUMMITMARLBOROUGH BUSINESS INNOVATION SUMMIT

Showcasing Marlborough as a Center for Key Industry Clusters and Innovation Capacity

Co-sponsored by:

NON-COMPETE AGREEMENTSProtecting Customer Goodwill and Confidential

Information with Non-Competition Agreements:

Are They Even Worth the Paper They’re Printed on?

800.922.8337www.mirickoconnell.com

WORCESTER | WESTBOROUGH | BOSTON

MIRICK, O’CONNELL, DEMALLIE & LOUGEE, LLP

September 22, 2010

By: Jonathan R. Sigel

jsigel@mirickoconnell.com

MARLBOROUGH BUSINESS INNOVATION SUMMIT

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

ROAD MAP Prized Assets: Confidential Information and

Customer Goodwill

Tools to protect

1. Non-Disclosure Agreements

2. Assignment of Developments Agreements

3. Non-Solicitation Agreements

4. Non-Compete Agreements

5. Inevitable Disclosure Doctrine

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

ROAD MAP (CONTINUED)

How the courts in Massachusetts view these restrictive covenant agreements

Drafting tips to increase likelihood of enforceability

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

GOALS

Better understanding of the legal landscape regarding non-compete agreements (attempt to remove the frustration factor)

Action steps to increase likelihood of enforceability

Better protection of trade secrets, confidential & proprietary information & customer goodwill

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

A WAR STORY

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

NON-DISCLOSURE AGREEMENTSKey Questions Who should be required to sign? All employees or a

subset?

What should be covered?

How long should the Non-Disclosure obligation last?

What if your employees have not signed a Non-Disclosure Agreement? Are you still protected?

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

CASE LAW & STATUTORY PROTECTION M.G.L. c. 93, §§ 42, 42A: Authorizes up to double damages for

theft of trade secrets.

M.G.L. c. 266, § 60A: Criminal sanctions for knowingly receiving stolen trade secrets (State prison for up to 5 years, up to $500 fine)

M.G.L. c. 266, § 30: Criminal sanctions for stealing trade secrets (State prison for up to 5 years, up to $25,000 fine)

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

CASE LAW & STATUTORY PROTECTION (CONTINUED)

MA Supreme Judicial Court: Employees have an implied obligation not to use trade secrets or other confidential information for the benefit of themselves or a competitor, if it would be to the detriment of the former employer.

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

ASSIGNMENT OF DEVELOPMENTS AGREEMENTS Designed to protect intellectual property Obligates the employee to disclose inventions Requires assignment of inventions to the

company

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

ASSIGNMENT OF DEVELOPMENTS AGREEMENTS (CONTINUED)Key Questions: Who should be required to sign?

What about developments already “in-the-works” when hired?

What about inventions shortly after departure?

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

NON-SOLICITATION PROVISIONS Customer Non-Solicit

• Duration of restrictions?

• Which customers

Employee Non-Solicit

• No Hire vs. Non-Solicit

• Duration of restriction?

• Reach back clause

Should all employees sign?

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

NON-COMPETE AGREEMENTSThe Basics Enforceability varies greatly by State

(e.g., CA, TX, GA, VA)

Must be limited to protection of legitimate business interests

• Trade Secrets

• Confidential Information

• Customer Goodwill

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

NON-COMPETE AGREEMENTS (CONTINUED)

The Basics (continued)

Must be reasonable in duration and geographic scope

Must offer valid consideration to employee when signing

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

NON-COMPETE AGREEMENTS IN MASSACHUSETTS

What constitutes valid consideration? Can at-will employees be required to sign?

What if you didn’t require signing at time of hire, but want to do so now?

What happens if an employee is promoted?

What if an employee receives a pay raise?

What if an employee has a material change in job duties?

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

NON-COMPETE AGREEMENTS IN MASSACHUSETTS (CONTINUED)

For how long after employment ends should a former employee be restricted from competing?

Can you restrict him/her worldwide?

Customer-based vs. Geographic-based Restriction

What if the Court finds that your Non-Compete is overboard?

Invalidate, Blue Pencil or Modify?

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

NON-COMPETE AGREEMENTS IN MASSACHUSETTS (CONTINUED)

Should all employees be required to sign?

What if an employee refuses to sign?

• Play hardball?

• Negotiate a less restrictive agreement?

• Pay to keep the employee on the beach?

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

NON-COMPETE AGREEMENTS IN MASSACHUSETTS (CONTINUED)

The danger of selective enforcement

The costs of careless drafting

Will the Agreement survive a merger?

What if an employee jumps ship to a competitor, but never signed a Non-Compete Agreement?

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

INEVITABLE DISCLOSURE DOCTRINE Established, but not firmly established, in

Massachusetts

Need near-identical job duties and responsibilities

Typically need to show that employee cannot be trusted. He/she will inevitably rely upon, use or disclose the employer’s confidential information.

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

KEY COMPONENTS OF A COMPREHENSIVE AGREEMENT

1. ID protectable interest (Customer Goodwill, Confidential Information)

2. Access contingent on entering into Agreement

3. Broadly define Confidential Information

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

KEY COMPONENTS OF A COMPREHENSIVE AGREEMENT (CONTINUED)4. Assignment of Developments

• Duty to disclose

• Presumption of ownership by Co.

• Assignment to Co.

• Carve-out for pre-existing inventions

• State specific language (CA, DE, WA, IL, KS, MN, NC, UT)

5.Non-Disclosure provisions

• Indefinite

• May not take/rely upon/use/disclose

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

KEY COMPONENTS OF A COMPREHENSIVE AGREEMENT (CONTINUED)6. Non-Compete provisions

• Reasonable geographic & durational scope

• Customer-based scope

• Tailored to the individual

7.Non-Solicitation of Customers• Proper scope & duration

• Tied to direct contact and/or customers for whom the employee had access to Confidential Information

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

KEY COMPONENTS OF A COMPREHENSIVE AGREEMENT (CONTINUED)8. Non-Solicitation of Employees

• Specify duration

• Reach back clause

9.Return of company property provision

10.Affirm the At-Will relationship

11.Assignability provision

12.Right to Injunctive Relief

• Arbitration Clause?

13. Choice of Law & Venue

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

STATUS OF LEGISLATIVE EFFORTS

TO

ERADICATE OR RESTRICT NON-

COMPETE

AGREEMENTS IN MASSACHUSETTS

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

LEGISLATIVE PROPOSAL

Efforts are dead for now, but are expected to be revived

Key Provisions Being Pursued:

• Not valid for employees with average gross income of <$75K

• Must provide copy at least 7 days prior to start of employment or with offer letter, whichever is earlier

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

LEGISLATIVE PROPOSAL (CONTINUED)

Key Provisions Being Pursued (continued)

• If signed after start of employment, need additional consideration – at least 10% of annual compensation

• Limited to duration of 1 year, except for garden leave (greater of 50% of base salary or $50K)

• 6 months is presumptively reasonable

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

LEGISLATIVE PROPOSAL (CONTINUED) Key Provisions Being Pursued (continued)

• Mandatory awarding of attorney’s fees to employee if court declines to enforce or alters the restriction in a material respect, or if court determines bad faith by the employer

• Discretionary awarding of attorney’s fees if court enforces as is and finds employee acted in bad faith

• Massachusetts Choice of Law for residents and those working in Massachusetts when terminated

© Mirick, O’Connell, DeMallie & Lougee, LLP, 2010.

QUESTIONS?