Trade secrets, confidentiality agreements, and covenants not to compete
Protecting confidential information and your right to work
What is a trade secret?
A trade secret is any piece of business information with economic value that has been kept confidential.
Trade secrets can include information, formulas, codes, methods, practices, and many other aspects of your business. This information is valuable and often essential to your competitive ability. It is essential that you actively protect the non-public secrets, business methods, and practices on which you rely. A trade secret is governed by many different laws, but most notably the state laws in which the secret is maintained.
Arkansas has a multi-factor test to establish whether information is a true secret worthy of protection by a court. The third factor is critical:
The extent to which the information is known outside the business;
The extent to which the information is known by employees and others involved in the business;
The extent of measures taken by the company to guard the secrecy of the information;
The value of the information to the company and to its competitors;
The amount of effort or money expended by the appellee in developing the information; and
The ease or difficulty with which the information could be properly acquired or duplicated by others.
There is no certificate or registration number assigned to a trade secret. The protection requires that a judge establish it. These are very difficult to establish and require a complex review of the above factors, the most important of which is the steps taken to ensure the secrecy of the information. For this reason, many employers require employees to sign Confidentiality Agreements.
Why protect your trade secrets?
While it is common for businesses to invest substantial time and expense into making their products or services even more competitive in the marketplace, many of those same businesses fail to recognize the risk in a former employee disclosing the results of your hard work—your secrets—to their next employer.
The same risks must be addressed when your company collaborates with other companies or outsources elements of your business that incorporate your trade secrets.
Confidentiality agreements
A confidentiality agreement is an essential piece of the strategy in protecting trade secrets. Absent a confidentiality agreement, many business trade secrets are at greater risk of being stolen or misappropriated. Tyson Foods, Inc. v. ConAgra, Inc., 79 S.W.3d 326 (Ark. 2002). In that case, the Arkansas Supreme Court found that post-employment confidentiality agreements or covenants not to compete would weigh heavily in the inquiry as to whether the nutritional content information of chicken feed was a company trade secret. The Court found that confidentiality agreements or covenants not to compete would have been “active efforts on the part of Tyson to protect proprietary information it considered to be a trade secret.”
Noncompete agreements
Noncompete agreements have become commonplace in today’s workplace, and we receive many calls from clients who have signed noncompete agreements without reading the fine print. Please always consult an attorney prior to signing a noncompete agreement. These agreements have been a major source of litigation, especially when an employee leaves one company and begins work for a direct competitor. Arkansas, together with many other states, generally looks unfavorably on contracts that restrict a person’s future ability to earn an income.
However, even with this skeptical view, the Arkansas legislature recently changed the way that courts review noncompete agreements. Prior to 2015, a court finding a noncompete agreement overly broad would void the entire contract that included the noncompete agreement. Borden v. Smith, 478 S.W.2d 744, 747 (Ark. 1972). Under the new law enacted in 2015, the same court would merely rewrite the agreement so that it becomes enforceable, keeping it valid. Ark. Code Ann. § 4-75-101(f).
This “blue pencil doctrine” represents a major departure from past precedent, and it serves as a real win for employers – and a heavy obligation on the employee. It encourages employers to write extremely broad, unenforceable noncompete agreements knowing that if the employee decides to challenge the agreement in court, the employer will still get the maximum restriction the reviewing court will permit. Because the court will enforce the most severe version of a noncompete permissible, it is critical that you have any noncompete agreement reviewed by counsel prior to signing it.
Protecting your trade secrets requires a holistic approach
However, confidentiality agreements and covenants not to compete are not the only options available for a company to establish that information is a trade secret and that efforts were made to protect it. “Those measures include detailed record-keeping procedures, physical security, confidentiality agreements, vendor and supplier confidentiality agreements, use of confidential stamps and legends, computer security measures like passwords, and the use of entrance and exit interviews.” Tyson Foods, Inc. v. ConAgra, Inc., 79 S.W.3d 326, 332 (Ark. 2002).
Our attorneys can help you implement a system that is designed to:
Identify trade secrets;
Establish policies and best practices for your employees; and
Enforce those agreements to prevent unauthorized sharing of your valuable trade secret assets with the public or your competitors.