A covenant not to compete is an agreement or contract that prevents or restains a person from performing a lawful profession, trade, or business for a period of time. For instance, an engineering firm may want to restrain departing employees from working at competing companies for a certain period of time. The rationale behind these noncompetition provisions is based on the argument that a departing employee will inevitably use concepts, ideas, and potentially trade secrets learned while working at the company once it goes to work for a competing firm. What companies regard as valuable IP is often very broad and goes beyond the legal definition of trade secrets (e.g. employeed trainning, business methods, general experience gained while working, etc.) The regulation of these contracts is a matter of state law and varies from state to state. In general, however, any contract that presents a person from performing his lawful profession or business is generally considered to restrain free trade and is not favored by the corts. Some states, such as California, prohibit these type of restrains on trade. These contracts are enforsable when they meet the requirements of 1) consideration (i.e. the employee must receive something in exchange from it), 2) protection of a legitimate business interest, and 3) reasonabless of the restrain (duration, scope, etc).

Covenants not to compete are intimately related to trade secrets. In fact, companies use these contract to protect their "intellectual property" (defined in more general terms than its legal definition) and competitive advantage. While companies may not be able to enforce some of the noncompetition provisions in certain states, they always can prohibit an employee from using "confidential information" (i.e. trade secrets). If the company can demonstrate that a departing employee is using information that meets the legal requirements of trade secret, it can file a lawsuit to prevent this from happening and seek compensation for the damages caused. The success of these lawsuits greatly depends on the specificity of the trade secret and the company's trade secret management and security plan (e.g. the nature of the confidentiality agreement, how the company treats the secret information, etc.).

Primary Reference:
[1] Stim, R. "Intellectual Property. Patents, Trademarks, and Copyrights" West Legal Studies.
[2] Black's Law Dictionary 5th ed., (West Publishing, 1979).

Tags: trade secrets

Trade secrets (i.e. any formula, pattern, device, or compilation of information of economic value treated in confidentiality) are protected by state law in two ways: 1) misappropriation and 2) contract law. Trade secret law is primarily derived from common law, state statues, federal law, and the Restatement of Torts. State laws prohibit the misappropriation of trade secrets. Under the Uniform Trade Secrets Act of 1975 (amended in 1985) misappropriation is defined as "(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (ii) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret; or (B) at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was (I) derived from or through a person who has utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of his position, knew or had reason to know that it was a trade secret ad that knowledge of it had been acquired by accident or mistake."

The Uniform Trade Secrets Act does not affect: (1) contractual remedies, whether or not based upon misappropriation of a trade secret, (2) other civil remedies that are not based upon misappropriation of a trade secret, and/or (3) criminal remedies, whether or not based upon misappropriation of a trade secret. Consequently, trade secrets are also protected under the principles of state contract law. Companies are advised to require the relevant parties to enter into a contract that includes a confidentiality or nondisclosure agreement.

Finally, in addition to the protection granted by state law, since 1996 trade secrets are also protected by federal law under the Economic Espionage Act of 1996.

References:
[1] Stim, R. "Intellectual Property. Patents, Trademarks, and Copyrights" West Legal Studies.
[2] Black's Law Dictionary 5th ed., (West Publishing, 1979).
[3] Uniform Trade Secrets Act of 1975 (amended in 1985)
[4] Economic Espionage Act of 1996

Tags: trade secrets