Written By: William E. Fischer
Kohner, Mann & Kailas, S.C.
The imminent departure of employees or consultants familiar with confidential information often prompts a company to reassess its defenses against the exposure of such information to those outside the company. In fact, employers may have more exposure than they realize.
Most companies utilize written employment agreements to secure confidentiality obligations. Typically, confidentiality clauses in such contracts have long lists of categories of information to be considered confidential, such as: “Trade secrets” (a term with a specific statutory definition), business strategies, projections, processes, methods, customer information, financial and pricing information, etc., with the intent of minimizing the risk that valuable information is unprotected. Realizing that courts rigorously scrutinize the terms of non-compete clauses, employers also typically want “confidential information” clauses to run longer than a non-compete, on the grounds that information retains value longer than the time that the business can legitimately stop competitive activity. Unfortunately, in practice, a “kitchen sink” approach may preclude protection altogether.
In recent years, courts have strictly limited agreements with the intended effect of preventing employees who leave from utilizing experience in related areas of business activity. Overbroad confidentiality clauses can have the unintended effect of preventing the former employee from using his experience legitimately, by operating as a disguised non-compete clause. Courts base decisions as to enforceability on the actual effect, not the stated purpose, of contractual wording, and a clause that imposes unreasonable bars on competition, regardless of its title, is likely to be struck down. If the unreasonable clause is that which protects confidentiality, all such protection will fall.
Negotiation of separation agreements can be effective. However, positioning may not be ideal and there may be thinly-veiled tension between the employer’s need to protect commercially valuable information, and the employee’s desire for terms clearly setting out what she may do.
One practical solution is to adopt an objective definition for what will be considered “confidential” under the agreement, rather than listing types of information. In essence, this approach defines confidential information not by its nature, but by its potential to cause identifiable harm were it to fall into the possession of a competitor.
This tactic effectively removes a number of problems. By focusing on attributes of information to be covered, it has the advantage of deferring decisions on whether or not a particular item of information is confidential or has commercial value until they crystallize. It also helps avoid disputes, by providing the former employee with a benchmark against which he—or a future employer—can evaluate whether actions are permitted. If a dispute arises, the definition lends itself to a straightforward determination as to whether or not the information was not generally known, and if disclosure harmed the company.
This approach reflects the requirements of the business, by promoting awareness of both the needs of the company and the role of the departing employee. A well-framed definition is likely to avoid enforcement problems, is adaptable to the changing significance of information over time, and saves time in negotiating the agreement. In addition, company and employee benefit from a better understanding of the parties’ rights and ability to act.
William “Bill Fischer is a litigator at Kohner, Mann & Kailas, S.C. in Milwaukee, WI. He concentrates his practice on corporate litigation and alternative dispute resolution. He has counseled a number of clients involved in disputes with prior employees or employers. Bill has been recognized as a Rising Star in Wisconsin by Super Lawyer magazine each year since 2006 and has been recognized as an “Up and Coming Lawyer” by the Wisconsin Law Journal. He can be contacted at email@example.com or by calling (414) 962-5110.