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3 Questions: How to Protect Your Business Secrets and Integrity When Hiring An Employee

Find out why you should consider non-compete and non-disclosure agreements for important positions at your business.

CONTEST ON/JTS: Contest winners and rules are at the end. Here is your trivia question for this week: What is the name and position of the patch.com guest I had on family law radio on Saturday, July 28, 2012?  Your answer can be found by listening here:  http://www.internetradiopros.com/familylaw/.

You have to listen to the beginning of the show to get the answer.

Consider this scenario: You have developed a chicken restaurant that uses a secret blend of spices. You also have a business model on how your restaurant is run and it has been very successful so far. In fact, in your opinion, none of your competitors have figured out your trade secrets and business model. However, if your blend of spices and business model became public information, the competition would be fierce.

Obviously to run a restaurant (and most other small businesses), you will need help from trustworthy employees. These employees will need to have access to your secrets to do their jobs. Here are three questions to consider before you hire that next employee that will have full access to your entire business model and your business secrets.  

The fundamental purpose of this article is that there is not a “cookie-cutter” contract that you can get that will match your business exactly to protect your secrets or protect you from competition. It is critical to talk to an attorney about what you want to protect and the best way to protect that information. For all issues in this article, buying an Internet-based form or a form at your local office supply store may create more problems than it solves. 

I use the term “employee” in this article, but this article equally applies to independent contractors, distributors, and anyone else that has access to your business secrets.

1. IS A NON-DISCLOSURE/CONFIDENTIALITY AGREEMENT IN YOUR BEST INTEREST?

A non-disclosure or confidentiality agreement is essentially what it sounds like: an employee signs an agreement that the employee will not disclose confidential information about your business. In our restaurant scenario, the business owner would want to protect two things: (1) the secret recipe, and (2) the operations manual on how the restaurant operates. Other businesses usually choose to protect client lists, distributor lists, vendors, and technology. In short, widget-based businesses usually protect the widget and service businesses protect the clients.  Everyone tries to protect unique technology. 

The basic elements to a non-disclosure agreement include provisions that the person who is gaining the secret knowledge to your business will not disclose those secrets to any other person nor use the information for their own benefit. Most importantly, non-disclosure provisions describe the penalties for disclosing the information. 

Specifically, one of the most important aspects to consider in a non-disclosure agreement is what happens if the agreement is broken. In almost all contract cases, your measure of damages is the actual damages to make you whole. For example, if someone agrees to paint your house and uses the wrong color, your measure of damages is not what you paid to get your house painted the first time. Rather, it is the cost of having someone else repaint the house. This amount could be more or less than the first painter.

Obviously if someone discloses your business secrets, it is more difficult to measure your actual and consequential damages. Consider talking to your contract attorney about using a “liquidated damages” clause when the actual damages are difficult to determine. Another must-have in a non-disclosure agreement is the ability to immediately stop the disclosure of confidential information. This is generally referred to as injunctive relief in a court of equity. However, you will in almost every circumstance need Court assistance to prevent further disclosure. 

Your business and your business secrets are unique to your business. Make sure your non-disclosure agreements are as unique as your business. 

2.  IS A NON-COMPETE AGREEMENT IN YOUR BEST INTEREST?

A non-compete agreement is slightly different than a non-disclosure agreement.  However, most of the time a non-compete and non-disclosure agreement are included in the same contract. A non-compete is essentially as it reads as well: the employee will not compete with your business for a specific period of time and within a certain geographical area after the employment terminates. 

Consider our chicken restaurant scenario again. The company hires a new vice-president and the vice-president has to know the secret spices and the business model to do his or her job. In fact, the vice-president becomes so good at the job that the vice-president decides that he or she can open a competing business that will be even more profitable than your business. 

A non-compete agreement is specifically intended to prevent a person who learns your trade from later becoming your competition because of the skills that person learned while working for you. The most critical aspect to having an enforceable non-compete agreement is that it is reasonable in time and scope. 

If you are the vice-president of an international chain of chicken restaurants, a global ban with a longer period of time may be reasonable. However, if the chicken restaurant is restricted to Tampa Bay, it is not reasonable to restrict the person from opening restaurants in Montana. Simply, a restaurant in Montana will not likely cause a loss of profit to the Tampa Bay restaurant. 

In short, whether your non-compete agreement is reasonable is based largely on judge-made law (case law) and should be specifically written for the size and scope of your business.

3. WILL YOU TURN AWAY QUALITY EMPLOYEES WITH EXPERIENCE IF YOU HAVE THEM SIGN A NON-DISCLOSURE AGREEMENT OR CONFIDENTIALITY AGREEMENT?

Non-compete and non-disclosure agreements should be used with caution and when appropriate. I can fully understand having a non-disclosure agreement for a minimum wage employee who needs to know the seven secret spices to prepare the chicken. However, preventing that employee from working for your competitor does not make very much sense. 

Further, you may be trying to hire someone who has 20 years of experience in the restaurant business to work in your business. This person’s only skill is restaurants and making them successful. You may want to consider whether this individual will sign a non-compete agreement when the only skill the employee has is making businesses like yours successful.  A non-disclosure agreement is perfect in this scenario, but perhaps an overly restrictive non-compete is not.

The final issue for this article to consider is that a non-disclosure agreement should recognize the difference between the inherent knowledge some employees bring to their job versus what is unique to your company. The seven spices may be a secret, but disclosing how to actually cook chicken may be why you hired the employee in the first place. Some contracts may be voided simply because you failed to consider the experience of the person and nature of your business. 

CONCLUSION

Your business is unique. Take the time to protect it in a unique way. Do your research to determine whether a non-compete and non-disclosure agreement is appropriate and all the matters that need to be covered. 

So here is the contest update: Kathy C has won the prior week’s trivia question and has asked us to donate to the Manatee County Red Cross. 

CONTEST ON/JTS ().  JT Simons, P.A., is holding a contest for you to figure out the hidden trivia question in this article. If you win, JT Simons, P.A., will donate $25 to charity. In short, figure out the hidden trivia question, send an email with the answer to JT Simons, and make sure your nonprofit is legitimate. Remember, send the answer to jts@simonslawfirm.com, subject line CONTEST ENTRY, and give me as much information as you can about the nonprofit you want the donation to go to. I need to verify it. I need your first name and the first letter of your last name. 

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