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IP and Tech Law Alert: Protecting Your Trade Secrets (and Customer Relationships!) from Former Employees: A Cautionary Tale in Base One Technologies, Inc. v. Ali

February 27, 2015

One of the most valuable forms of intellectual property can be a company’s trade secrets. For many companies, particularly service-oriented businesses, trade secrets include confidential customer information, such as customer pricing, customer purchasing history, and identification of key decision makers within a customer’s organization. One challenge companies face is the vulnerability of its customer relationships whenever an employee, such as a salesperson, leaves to work for a competitor or to start up a rival business. Many laws are designed to protect employers in such situations. Depending on the circumstances, former employees may be susceptible to claims for breach of fiduciary duty, unfair competition, tortious interference with business relations, unjust enrichment, and misappropriation of trade secrets. Standing alone, however, these laws often fall short as a practical remedy for protecting employers from misappropriation of their trade secrets.

There are a number of additional steps companies can take to safeguard trade secrets and customer relationships. While extraordinary protection measures are usually unnecessary, companies should take reasonable steps to protect commercially sensitive information, including client lists and other valuable customer information. This can be achieved by labeling documents as “confidential,” maintaining computer security, and providing access only to those with a reasonable need to know. Employees with access should be subject to nondisclosure agreements, and companies should also consider inserting non-competition and non-solicitation provisions in employment contracts to prevent their workers from stealing clients.

Great care must be taken in crafting these types of legal agreements with employees if they are to pass future judicial scrutiny. Many jurisdictions have a general hostility toward restrictive covenants in the context of employment, and courts often will invalidate these covenants unless employers strictly comply with statutory requirements. Complicating matters for employers is that the statutory requirements can vary dramatically from state to state.

In this regard, the recent case of Base One Technologies, Inc. v. Ali et al., Civ. Ac. No. 14-1520 (D.D.C., Jan. 20, 2015), serves as a cautionary tale of the rigorous scrutiny restrictive covenants will receive when invoked by employers. Base One was an information-technology firm that provided recruiting and staffing services to its customers. It hired defendants Mohammed Ali and Hossein Beyzavi to provide assistance to IBM, one of Base One’s “bread-and-butter” clients. While still at Base One, the defendants offered their services to IBM for full-time employment, thereby ousting Base One from the picture and depriving it of revenue by continuing to staff the positions. Base One sued, asserting what the court described as a “veritable cornucopia of claims,” including breach of a non-compete agreement for marketing competitive services to Base One’s customers and soliciting other employees. The defendants moved to dismiss all claims.

Ultimately, the court allowed the claims that relied on one section of the non-compete agreement to go forward while it dismissed the claims premised on a different section. The court held that the wording of the provision that restricted the defendants from soliciting or contacting Base One employees was so vague and ambiguous as to render it unenforceable. The Agreement did not expressly define the type of solicitation or contact that was prohibited. Although the court acknowledged that it could guess that Base One meant to prohibit solicitation or contact for the purpose of employment elsewhere, the provision did not so specify. In light of the general hostility toward restrictive covenants in the context of employment, the court would not redraft a poorly written, overbroad restraint to render it enforceable.

Take Away: Employers can and should take extra precautionary steps to protect their customer relationships and commercially sensitive information from departing employees. However, to ensure that non-disclosure, non-solicitation, and non-compete agreements will have the teeth that employers want, these agreements must be crafted with a full understanding of the laws of the jurisdictions that may be implicated. If these agreements are vague or overbroad in geographic or temporal scope, a company runs the risk of losing the protections it seeks, and ultimately the customers it wants to keep.