- with Senior Company Executives, HR and Inhouse Counsel
Three Ward and Smith attorneys provided context on the twists and turns of noncompete agreements by sharing the example of a hypothetical amusement park, where a nearby competitor is recruiting a talented roller coaster engineer.
In an interactive case study during Ward and Smith's annual Employment Law Symposium, the attorneys offered insightful guidance concerning the importance of narrowly crafted noncompete agreements, the enforceability of non-solicitation clauses, legal issues spiraling from corporate espionage, and whether it is possible to discipline employees for inflammatory social media posts.
The session used the firm's signature interactive case study technique to shed light on how the leadership at Seven Pennants Amusement Park should respond to their key employee, Ben, leaving to work for their nearby rival, Maple Peak, his theft of proprietary information, and how to leverage exit interviews to reinforce employees' understanding of their post-employment obligations.
The discussion featured insights from three members of the firm's Labor and Employment Practice Section: Ken Gray, leader of the practice section, Avery Locklear, and X. Lightfoot. X. and Ken are both Board Certified Specialists in Employment Law by the North Carolina State Bar.
Lay of the Land
Ben is a 10-year veteran of Seven Pennants and the Lead Roller Coaster Engineer. With an expertise in rollercoaster and amusement park design, he secured a design patent five years ago for components of The Thunder Tube"—an enclosed 4D experience with a corkscrew downward spin. The Thunder Tube" name is also a registered trademark.
Seven Pennants integrated Ben's innovation into their newest roller coaster, and it has become the most popular attraction. Executives at Maple Peak, located just two miles away, took notice and offered Ben a position that would represent a promotion with significantly higher compensation.
Signed Offer Letter
Audience members were provided with a copy of Ben's original offer letter, which spells out that his employment is at will and that he is prohibited from disclosing proprietary information, including trade secrets. The letter further states that he is prohibited from working for any competitor within a five-mile radius for a period of a year from the date of separation, and it specifically mentions Maple Peak.
An additional restriction in the offer letter prohibits Ben from soliciting his current and former employees to leave the company and/or join a different company.
"The reason we included the geographic radius is that, for a covenant to be valid, it typically has to be within a tight geographic scope," advised Gray. "Five miles would likely be viewed as a very reasonable restriction. Also, since it specifically names the competitor, the noncompete agreement would be more likely to be upheld."
Enforceability Considerations
In the non-competition clause of the offer letter, it states that the "employee shall not engage, directly or indirectly, in any capacity," in an activity competitive with the employer's business. "This is problematic for a few reasons. One is that, how is it possible to engage in work indirectly? The courts have struck down noncompete agreements for this reason," Gray explained.
The language that the employee is prohibited from working for a competitor "in any capacity" spells further trouble for the validity of the agreement. "The Janitor Rule does not mean that you have to clean up after yourself, it essentially just means that you're not supposed to restrict someone from working for a competitor in a different capacity," Gray said. These agreements have to be narrowly tailored to the situation.
Another strategy worth considering is the inclusion of a blue pencil clause, which allows the courts to strike out certain provisions that may make a noncompete agreement overly broad.
"Do you have to have a blue pencil clause? Why is it good to have a blue pencil clause?" asked Lightfoot, sharing a question from the audience.
A blue pencil clause is advisable, Gray explained, "because a lot of courts don't like restrictive covenants, so you should give them every reason to uphold it. Having something that could be modified to make the agreement valid in the eyes of the court could help save the document."
An additional section of the offer letter that could be viewed as overly broad is the language in the non-solicitation portion, where the employee is prohibited from "soliciting any current or former employee." Prohibiting the solicitation of any former employee would likely be considered overly broad, due to the length of the time period.
"Usually, for it to be valid, an agreement would prohibit soliciting someone the employee had worked with in the last 12 to 24 months," commented Gray. "Generally, you want to narrow it down and avoid the shotgun approach."
Review and Refine
An agreement that was valid 10 years ago may no longer be enforceable due to the tumultuous, shifting landscape of employment law. "Around one or two cases on restricted covenants come down a year, and it doesn't take much to change things significantly. These should be reviewed on an annual basis, just as you would for virtually all of your other employment-related documents," Gray added.
Although clients have asked the firm's legal team to create a template for their noncompete agreements, employers should proceed with caution. "It is not uncommon for people to modify a template agreement in such a way that makes it invalid," noted Gray.
Having legal counsel review the agreements periodically can help to head off problems before they occur and ensure the agreements are valid. "Things can vary from state to state, and a change that appears insignificant on its face can have vast repercussions," said Gray, "so if you're outside your comfort zone, make sure to contact legal counsel."
Mission Possible?
The next phase of the scenario involves a clandestine meeting between the CEO of Maple Peak and Ben, who believes the opportunity could depend on him bringing The Thunder Tube" design patent. Since Ben was the named inventor on the patent and does not recall signing anything with Seven Pennants that would limit his ability to use it, he thinks it would be acceptable to port it over to Maple Peak.
Prior to the meeting, Ben accesses the secure database at Seven Pennants and downloads extensive proprietary information, including schematics, stress-testing results, and a supplier list. During the meeting, Ben shows the CEO all the information and walks him through how it could be used.
Lightfoot asked the audience, "What policies or onboarding processes could have helped Seven Pennants—especially regarding intellectual property ownership?" "An assignment of inventions provision could have helped prevent this from occurring," Lightfoot explained. "This would basically state that all inventions that Ben conceived or reduced to practice during Ben's employment are the property of Seven Pennants. In such a case, ownership of the patent would legally transfer to Seven Pennants, and Ben has no personal rights to use or license it elsewhere (such as Maple Peak).
In the absence of an assignment of inventions provision, Ben owns the patent as the named inventor, but Seven Pennants may still be able to use the patent in its business. "If Ben made the Thunder Tube" design patent during the course of his employment with Seven Pennants by using company resources or on company time, then Seven Pennants would have an implied, royalty-free 'shop right'. This is a nonexclusive, nontransferable license that allows Seven Pennants to continue using the Thunder Tube" patent if Ben leaves the company, even though he owns it. This could easily change the dynamics of the scenario," added Lightfoot.
An ounce of prevention can help in many aspects of life, including the employment relationship. "A strong employment agreement with an assignment of inventions provision could have limited, if not completely prevented, this from happening, and believe it or not, we've had cases where people are downloading and accessing proprietary company information in the last two weeks they're employed, whether they believe they own the information or not," mentioned Lightfoot.
The legal team at Ward and Smith has a variety of tools available to remedy similar situations. One is a proven vendor that performs forensic analyses of IT systems to determine the type of information that was removed and who took it, along with the date/time of the occurrence.
"We can file for a temporary restraining order to immediately stop the departed employee from using or disclosing the proprietary materials, seek injunctive relief, and pursue monetary and possibly punitive damages for misappropriation of trade secrets, breach of contract, and other related claims," commented Lightfoot.
Leveraging Exit Interviews
An exit interview can be an effective tool for HR professionals to remind employees about the agreements they have signed and their obligations. "This is where the employer tells the departing employee they are expected to remain compliant with the obligations they initially agreed to, for the duration of the restriction. Sending a letter to that effect is also advisable, such that the conversation is documented," explained Lightfoot.
A severance agreement with funds attached can serve as a useful carrot for an employee to sign a release, as well as a reminder of post-employment obligations. "This helps if you have to go to court, since you can show you attempted to compromise with the employee, you had a pre-employment agreement, and you provided severance, reminding that person of those restrictions," advised Lightfoot.
An employment agreement is binding, regardless of whether the former employee decides to ignore the separation agreement. "For someone that just up and disappears, you're going to want to do a forensic analysis of their computer," mentioned Gray. "Be suspicious and be on the lookout for what people are posting about on social media to see if they've found a new job."
What about Trade Secrets?
An audience member wondered: "Would Maple Peak be liable for accepting proprietary information from Ben?"
In response, Lightfoot tapped audience member Gavin Parsons, a litigation attorney specializing in trade secrets. "Ben could be in trouble both civilly and also criminally. That's probably fairly obvious, but some of you may be on the fence about Maple Peak, since they didn't ask for the information; it just landed in their lap," noted Parsons.
"It boils down to what they do with it," continued Parsons. "If they hire Ben, there's going to be trouble, but if they throw up their hands, don't use the information in any way, and admit they've received trade secrets, they'll probably be okay."
Maple Peak will likely be sued and should immediately seek counsel, however. "Most companies in that situation are not going to believe their competitor didn't do anything with the information, but Maple Peak could mitigate risk by bringing in an attorney to stop everything, quickly establish communication with Seven Pennants to seek a resolution, and they will probably not have legal liability," added Parsons.
Terminating Online?
Safeguarding information can be particularly challenging when terminating a remote employee. "What should you do if someone needs their work computer so you can terminate them over Teams?" asked an audience member.
"Restrict their access to your systems if you know things are heading toward a termination," advised Locklear. "You also want to have them ship their computer back to you as quickly as possible, so IT can determine if something was removed," noted Lightfoot, "and you can call legal counsel for help."
Reaching out to IT prior to the termination is the best way for employers to be proactive. "We get IT on the ready so they can eliminate their access as soon as termination occurs," said Gray.
Social Media Policy Enforcement
In the final scenario, Ben posts on social media about the twists and turns on the horizon for him in his new employment with Maple Peaks. The Human Resources Director at Seven Pennants hears about the posting and asks her assistant to print screenshots of the responses from certain employees to review in her afternoon meeting with management. After reviewing the employee postings, the Human Resources Director is shocked at some of the responses and wants to enforce Seven Pennants' social media policy.
Participants were provided a copy of the social media policy, which stated that employees are prohibited from disparaging Seven Pennants, its owners, and other employees on social media. "This type of policy would not be enforceable," said Locklear. Such policies have to be more narrowly tailored. However, depending on the content of the postings, the employees may be subject to disciplinary action. Participants were then provided a copy of the employee postings and asked to determine whether the employees could be subject to disciplinary action.
Among the employee postings, Logan, a current Seven Pennants employee, stated, "Good for you, Ben! Raising a glass to celebrate you!" The post included a picture of Logan with a beer in his hand and roller coasters in the background.
"If Logan is just enjoying the park on his day off, the post is fine. If he's enjoying a travel beer when he is supposed to be working, that's a different story," laughed Locklear.
Another post from a Seven Pennants employee, Cameron, read, "Congratulations!! Was it that new personal leave policy that really took you over the edge? Fifteen hours a year, pretty ridiculous. Seven Pennants Employees, like this comment if you would like to get together to discuss what we can do."
"Can this activity be punished? No, probably not, unless he was blatantly lying about something," noted Locklear. "Cameron is just engaging in protected concerted activity."
Among the more disgruntled employees, Laura weighed in by posting: "I don't blame you, Ben! Seven Pennants is run by seven red flags. I guess that's where the name came from, ha. I tell you what, if Jim doesn't stop riding my (peach emoji) he's going to be raising that white flag early. Watch it Jim, I don't just know how to fix coasters, I also know where the fuel line on your car is located."
"This one could definitely subject Laura to disciplinary action," Locklear explained, "as the post is communicating a threat."
In another employee post, Phil commented: "Congrats, friend! I'm happy for you...going to reach out about a job over at Maple Peaks...texting you now!" In the interactive scenario, participants were asked whether Seven Pennants can enforce its non-solicitation provision against Ben. Gray explained that Ben did not violate his non-solicitation agreement just because Phil posted. However, Gray explained that if he were Ben, then he "would state in writing I can't be a part of this conversation because if Ben facilitates the move in any way, it could be deemed a violation."
Participants seemed fully engaged in the exercise, and questions continued after the presentation time had concluded.
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