Loose Lips Sink Ships: A Guide to Crafting an ‘Unsinkable’ Restrictive Covenant
In the beginning of an employment relationship, companies are usually not thinking about what might happen when the employee leaves the company. While it is not a good idea to assume a working relationship will not work out, it would be foolish to be unprepared in the event that it crumbles.
Purpose and Basic ConstructionLife and people are unpredictable as factors affecting the business relationship between an executive, and his or her employer are in constant motion. In order to ensure that your company remains safe from disclosure of secrets, processes, and procedures to your competition, many believe that it is important for every contract (especially with regard to senior executives) include an airtight restrictive covenant. The law works a bit differently in California, however, and if an employer is not careful it could end up embroiled in protracted litigation. The purpose of a restrictive covenant is to bind an employee's words and actions, as they relate to the sharing of business secrets and other protected information to third parties (namely, competition). In all states, there are some prohibitions on the duration and scope of such agreements, so it is important to know these boundaries and draft an agreement that still provides the maximum amount of protection for your company. In California, these clauses in employment contracts are also called non-disclosure clauses and must be carefully drafted to pass muster under the law. California courts have found that public policy overrides a company's rights to use these clauses to prevent what they perceive as unfair competition from an employee who moves to a competitor later in his or her career.
Binding EmployeesEmployers are not left without hope, however, as California law allows employers to bind employees via a clause preventing the employee from disclosing any trade secrets. Some argue that there is little left to disclose outside of trade secrets, but courts have routinely upheld them to ensure open competition in the State. Employers should draft the non-disclosure clauses in a manner that makes it clear to employees what exactly they will be prohibited from sharing once the employment relationship ends. It is also recommended for employers to include an explanation of what is considered a trade secret under the contract clause.