Protecting Trade Secrets in Employment Contracts

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 Why Should I Use Employment Contracts to Protect My Trade Secrets?

In general, trade secrets are most often leaked by a former employee after a dispute with their employer. However, there are some instances where a former employee may leak a trade secret to gain an advantage with a new employer or even by mistake.

One method that employers can use to prevent such situations from occurring is by incorporating a provision regarding trade secrets in a worker’s employment contract. The provision acts similarly to a Non-Disclosure Agreement (“NDA”) in that the employer can sue an employee for breach of contract if they disclose the employer’s trade secrets to outside persons or entities.

In other words, an employment contract can help employers to limit the risks they take in revealing sensitive company information to employees who might need it to perform their job duties.

For example, an employer may need to tell an employee in the manufacturing department the recipe for a certain food or a formula for a particular cleaning solution so that the employee can create the final product, which will then be sold to consumers for profit. An employer can use an employment agreement to protect this type of information from being revealed to others.

As its title implies, an employment contract is a type of contract. Therefore, if you are an employer who is considering using an employment contract in order to protect your business’s trade secrets, you should contact a local lawyer for further legal assistance with drafting or amending an employment contract.

How Can I Use an Employment Contract to Protect My Trade Secrets?

The most common way that employers can use an employment contract to protect their trade secrets is by adding a non-compete covenant or clause to a worker’s employment contract. A non-compete covenant is simply a provision that specifies which employer information is protected by law in a contract.

Aside from trade secrets, some other examples of the types of proprietary information that may be protected by non-compete clauses include:

  • Business materials that have been copyrighted, trademarked, and/or patented;
  • Confidential information, such as formulas, algorithms, and various secrets that help an employer to operate their business in a manner that gives them an edge over other marketplace competitors; and
  • Sensitive information associated with a particular business (e.g., client lists, marketing plans, company practices, demographic information, and soon-to-be-released company products or services).

Some other standard methods that an employer can use and/or other clauses that an employer can insert into an employment contract to protect their trade secrets include the following:

  • Non-disclosure agreements (NDAs): As previously mentioned, employment contracts may contain provisions like non-compete covenants that operate similarly to an NDA. The main difference between the two is that an NDA is an entirely separate legal document and is not included as a provision within an employment contract like a non-compete covenant. In addition, an NDA document is required to be relatively specific in comparison to a non-compete covenant, which serves as a catch-all protective measure.
  • Covenants not to compete: Covenants not to compete, also known as restrictive covenants, are provisions in an employment contract that prohibit an employee from soliciting business from or accepting a job with their employer’s marketplace competitors. Covenants not to compete usually cover a particular geographic area as well as specify a certain period of time that an employee is bound by under its terms. This may help to ensure that an employee does not profit off of or divulge trade secrets to an employer’s competitor.
    • It should be noted, however, that if an employer decides to incorporate a covenant not to compete in an employment contract that the covenant is reasonable and not considered to be illegal under their individual state or general contract laws. Such covenants must also be limited to a particular industry and must not be placed on an employee for an unreasonable amount of time.
  • Trade secret laws: Employers should also have a lawyer review and inform them about current trade secret laws and regulations. An employer may include trade secret laws as part of an employment contract and can provide in-depth details on the security measures that they have taken to protect their business’s trade secret information.
    • This will help to ensure that an employee understands their obligations concerning trade secret information and what their employer expects of them both during employment and after their employment period ends.
  • Trailer clauses: A trailer clause requires an employee to hand over their rights to any information or inventions they discovered during their employment period to a business after they leave or are terminated. As with other clauses on this list, this can guard against the ability of a former employee to use an employer’s trade secrets to compete against them in the marketplace.
    • However, trailer clauses typically must be restricted to only apply to inventions that result from an employee’s work at the company. Otherwise, a court may rule them to be unenforceable or illegal. It is also important to note that these types of clauses may not be recognized by all states and that unreasonable time periods may invalidate such clauses.
  • Assignment of invention clauses: Like a trailer clause, an assignment of invention clause offers an extra protective measure by explicitly stating that any trade secret information that is produced or acquired by an employee generally belongs to the employer. Employers may want to consider incorporating an assignment of invention clause in an employment contract to clarify that the employer will own all related rights to an invention or trade secret information.

Are All These Employment Contract Clauses Legal?

In general, employment contracts and the clauses or terms that they contain are typically governed by state law. Therefore, many of the answers to this question will depend on both individual state law as well as the specific terms provided in a particular worker’s employment contract.

In most cases, so long as the restrictions that some of these clauses place on employees or the employee-employer relationship are reasonable and valid, they will be considered to be legally enforceable in court.

In addition to speaking with a qualified attorney, an employer can perform an initial review of such clauses to determine if they are reasonable by looking at the overall fairness of the limitations that the clause places on an employee, the length of time that the clause will bind the employee to whatever actions the provision calls for, and the effect it will have on the employee’s ability to earn a standard living.

To be sure that a clause is in fact legal, however, employers should consult with a local attorney to confirm that their findings are accurate, that an employment agreement is legal, and that no other laws will restrict them from including any of the clauses mentioned in the above list in their employment contracts.

Do I Need a Lawyer Experienced in Trade Secret Law?

Although employers can easily hire a lawyer who has experience in either employment law or with contracts, it is generally recommended that you consult with an intellectual property lawyer when it comes to incorporating trade secret law in your contracts. This is because an experienced intellectual property lawyer may have specialized knowledge about trade secrets that another type of lawyer may not be aware of or up-to-date on this legal field’s current laws.

Thus, you should at least speak to a local contract lawyer. They can help to ensure that an employment contract contains the specific terms and provisions you may need to provide protection over your trade secrets as well as your rights under state and general contract laws. Your lawyer can also make sure that an employment contract is drafted in a manner that does not infringe upon an employee’s rights as well.

In addition, if you need assistance with suing a former employee for breaching an employment contract or disclosing your company’s trade secrets, a lawyer will be able to help you with filing a lawsuit against that employee. Your lawyer can also help you to draft the necessary legal documents for your case as well as can provide legal representation in a court of law or in arbitration, depending on the terms of the relevant employment contract.


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