STRONG NON-COMPETE AND CONFIDENTIALITY AGREEMENTS AND PRACTICES ARE CRITICAL TO ACQUISITION

By: Shannon Hampton Sutherland[1]

Experts predicted that strong M&A activity would continue from 2015 into 2016.[2] So far, that prediction appears to hold true, particularly in the biotech sector. If you want to position your company for potential acquisition under attractive terms, either in 2016 or down the road, are you ready? Locking down the company’s “non-compete” and confidentiality agreements and practices early is mission-critical.

These agreements (including confidentiality and invention agreements, non-compete agreements, and non-solicit agreements) help the company protect legitimate business interests, like the benefit of its investment in its technology, confidential information, and trade secrets, goodwill with its customers, and training of its employees. If your company doesn’t have strong programs and agreements in place with its employees, independent contractors, and consultants to protect these important assets, it might lose value in the eyes of a potential acquirer.

This lesson holds especially true in industries that are heavily-reliant on sensitive technological innovation or field-based sales organizations. One of your highest priorities should be making sure that the company has strong and enforceable confidentiality and non-compete agreements (if permissible in your jurisdiction) with these individuals and programs in place to protect the company’s interests.

  • Identify and Address Gaps in the Protection of Confidential Information. The company should work with legal counsel to identify potential gaps in its programs and procedures designed to protect its confidential information. For instance, how strong is the company’s network security? Does the company have strong policies and procedures in place concerning access to data that resides outside of the network? Are the company’s written policies being followed in practice? Does the company only grant access to such information on a need-to-know basis, or is information too readily available or left unprotected? Are sensitive materials identified as such? Does the company take reasonable steps to ensure that departing employees return, and do not retain access to, confidential information? A potential acquirer will want to see strong and consistent policies and procedures in place – and followed – to protect the assets it is acquiring.
  • Address Agreements With New Employees on the Front-End. Although not required in all jurisdictions, it’s good practice to let a new candidate know that he or she will need to sign a confidentiality or non-compete agreement as a condition of employment (if appropriate for the position and permissible in your jurisdiction). Indeed, some jurisdictions have special rules about whether the employee must receive a copy of the agreement in advance, and when the new employee must sign the agreement. The company can work with HR and legal counsel with expertise in this area to ensure that the company is complying with any necessary requirements for new employees.
  • Identify and Address Individuals Without Existing Agreements. HR and legal counsel should identify employees (and independent contractors and consultants) who have not signed confidentiality, invention, non-compete, and non-solicit agreements. For individuals who don’t have an agreement, but who have access to the company’s confidential information or goodwill, the company can work closely with legal counsel well-versed in this area to consider whether an agreement is appropriate and craft an agreement that will stand muster for position at issue and in the jurisdictions that might be implicated. For instance, in some jurisdictions, for an agreement signed after the commencement of employment to be enforceable, the company must provide additional consideration to the employee (such as a promotion, payment, or increased compensation).
  • Consider Assignment and Successor Clauses. The company should consider with legal counsel whether to include provisions providing that the employee expressly consents to the assignment of the restrictive covenants by the company at any time, and that the restrictive covenants are enforceable by the company’s successors and assigns. That type of language isn’t required in all jurisdictions, but, in some jurisdictions, it may bolster a successor company’s or assignee’s ability to enforce the agreements – something a potential acquirer will look for when considering your company for potential acquisition.
  • Identify and Remediate Potential Holes in Existing Agreements. Experienced legal counsel should also review existing agreements to determine any potential holes in those documents and whether adjustments can or should be made to both meet the company’s business needs and comply with any applicable law. For example, sometimes agreements in the employee’s file pre-date important clarifications in the law that must be addressed. Or, perhaps the existing agreement is written too narrowly so that it doesn’t protect the full extent of the company’s interests or current or planned business model. On the flip side, the agreement may be too heavy-handed or written so broadly that it won’t be enforceable at all under the law of a state that won’t reasonably modify an overly broad agreement. Counsel well-versed in non-competes can help the company identify and suggest ways to remediate these (and other) potential deficiencies before it’s too late.

Bottom line: Early and regular review of the company’s non-compete and confidentiality agreements and practices is an important piece of positioning the company for favorable acquisition. Counsel well-versed in this area can help the company navigate the complex issues that come into play.

Nothing contained in this blog is intended to or does create an attorney-client relationship or provide legal advice.

[1] Shannon Hampton Sutherland is the Co-Chair of the Duane Morris Non-Compete and Trade Secrets practice and a nationally-known non-compete, trade secrets, and litigation attorney. See http://www.duanemorris.com/attorneys/shannonhamptonsutherland.html.

[2] See, e.g., http://www.forbes.com/sites/jeffgolman/2016/01/11/four-reasons-2016-will-be-a-strong-year-for-ma/#27221a634d49 (last accessed Apr. 8, 2016); http://info.kpmg.us/ma-survey/index.html (last accessed Apr. 8, 2016).

The Long Smoldering Debate About Noncompetition Reform in Massachusetts Is Re-Ignited by House Speaker

By Bronwyn L. Roberts and Gregory S. Bombard

On March 2, 2016, Massachusetts House Speaker Robert A. DeLeo promised to put new legislative limits on noncompetition agreements, reigniting the debate over non-compete reform legislation that has continued since at least 2009.  In a speech to the Greater Boston Chamber of Commerce’s annual Government Affairs Forum, DeLeo said that he would push legislative reform with the following restrictions for enforceability of noncompetition agreements:

  • noncompetition agreements would be limited to one year;
  • noncompetition agreements would not apply to lower-wage workers; and
  • workers must be clearly informed that a noncompetition agreement is required before taking a job, including a “stated right to counsel.”

Continue reading “The Long Smoldering Debate About Noncompetition Reform in Massachusetts Is Re-Ignited by House Speaker”

New Sixth Circuit Decision on Uniform Trade Secrets Act Underscores Importance of Proving Lost Profits In Trade Secrets Cases

Lawrence H. Pockers and Gregory S. Bombard

Trade secret plaintiffs have a bevy of remedies available. On the monetary remedies side, plaintiffs often choose to measure their damages based on the profits realized by their competitor. Focusing on the defendant’s wrongfully-gained profits is in many cases easier than proving that the plaintiff’s profits diminished as a result of the theft. Plaintiffs are often also skittish about revealing the amount of their own losses to their competitors.

But a new case from the Sixth Circuit — Allied Erecting & Dismantling Co. v. Genesis Equip. & Mfg., Inc., No. 14-3563, 2015 WL 6685380, at *1 (6th Cir. Nov. 3, 2015) — demonstrates why proving the plaintiff’s “actual loss” at trial is an important part of protecting a plaintiff’s business from further harm.  Continue reading “New Sixth Circuit Decision on Uniform Trade Secrets Act Underscores Importance of Proving Lost Profits In Trade Secrets Cases”

New Sixth Circuit Case Imposes Liability For Theft Of Confidential Information That Does Not Qualify For Trade Secrets Protection

Michael R. Gottfried, Shannon Hampton Sutherland, and Gregory S. Bombard

Orthofix, Inc. v. Hunter, —- Fed. Appx. —–, 2015 WL 7252996, at *1 (6th Cir. Nov. 17, 2015).

The Sixth Circuit recently ruled, in an unpublished opinion, that a former employer could recover against a former employee for breach of a confidentiality agreement, even if the information the former employee took, used, or disclosed did not qualify for trade secret protection.

In Orthofix, the plaintiff company was a medical device company that markets bone growth stimulators to health care providers.  The defendant employee was a sales person for the plaintiff for twelve years.  At the time of his hiring, the defendant employee signed a nondisclosure agreement, which he reviewed with an attorney and on which he specifically underlined the definition of “confidential information.”  Continue reading “New Sixth Circuit Case Imposes Liability For Theft Of Confidential Information That Does Not Qualify For Trade Secrets Protection”

“Intent to be Legally Bound” Insufficient Consideration for Non-Compete in Pennsylvania

On November 18, 2015, a 4-1 majority of the Pennsylvania Supreme Court (Justice Eakin, dissenting) held in Socko v. Mid-Atlantic Systems of CPA, Inc., No. 142 MAP 2014, that a post-employment covenant not to compete entered into by an employee after the start of his employment was void for lack of consideration, despite the fact that the agreement containing the non-competition covenant included language that the parties “intend to be legally bound.”  In so doing, the Court affirmed the Pennsylvania Superior Court’s May 13, 2014 order which, in turn, had affirmed the trial court’s grant of partial summary judgment to the plaintiff/employee.  Socko v. Mid-Atlantic Systems of CPA, Inc., 99 A.3d 928 (Pa. Super. 2014).  Continue reading ““Intent to be Legally Bound” Insufficient Consideration for Non-Compete in Pennsylvania”

The Continuing Split of Authority in the Interpretation of the Computer Fraud and Abuse Act

One of my recent blog posts highlighted how the United States Supreme Court’s dismissal of the petition for writ of certiorari seeking review of the Fourth Circuit’s opinion in WEC Carolina Energy Solutions, LLC v. Miller, 687 F.3d 199 (4th Cir. 2012), dashed the latest hope for the resolution of the Circuit split over the scope of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030. Click here to read prior blog entry. A recent decision out of the United States District Court for the Southern District of New York demonstrates that differing opinions on the scope of the CFAA continue to exist even, in some cases, within the same federal judicial district.

Continue reading “The Continuing Split of Authority in the Interpretation of the Computer Fraud and Abuse Act”

Duane Morris Partner Lawrence Pockers Honored by Support Center for Child Advocates

Duane Morris is pleased to congratulate partner Lawrence Pockers, who has been selected by the Support Center for Child Advocates as a Distinguished Advocate for 2013. The award celebrates the extraordinary efforts of individuals who help children in Philadelphia. Pockers has been a longtime pro bono child advocate, representing many abused and neglected children in Philadelphia in addition to serving on the Child Advocates’ Volunteer Committee. He will receive the award at the Child Advocates 2013 Annual Benefit Reception & Auction on April 10 at the Crystal Tea Room (Wanamaker Building) in Philadelphia.

Click here to read the press release.

Massachusetts Proposed Legislation Limiting Employee Non-Compete Agreements

Massachusetts made headlines in the area of non-compete law in 2009 when a bill was introduced in the state legislature that would have (had it been signed into law) prohibited employee non-competition agreements. Now, four years later, the same state senator who introduced the 2009 bill has partnered with another legislator to introduce a new bill that, if signed into law, would make non-compete agreements longer than six months presumptively unreasonable in Massachusetts.

Continue reading “Massachusetts Proposed Legislation Limiting Employee Non-Compete Agreements”

Latest Hope for U.S. Supreme Court to Weigh in on Circuit Split Over Scope of the Computer Fraud and Abuse Act Dashed

On January 2, 2013, the United States Supreme Court dismissed the petition for writ of certiorari seeking review of the Fourth Circuit’s opinion in WEC Carolina Energy Solutions, LLC v. Miller, 687 F.3d 199 (4th Cir. 2012). With the dismissal of WEC Carolina’s petition, the latest hope for the United States Supreme Court to weigh in on the Circuit split over the scope of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030, was dashed.

Continue reading “Latest Hope for U.S. Supreme Court to Weigh in on Circuit Split Over Scope of the Computer Fraud and Abuse Act Dashed”