EMPLOYMENT AGREEMENTS FOR HIGH TECHNOLOGY COMPANIES

Copyright © 1993 Christopher R. Costa.

Recent decisions concerning intellectual property rights of high technology employers vis a vis their former employees and competitors highlight the need for well drafted employment agreements. Key employment practices to protect proprietary information and intellectual property assets include the following:

1. Implement employment agreements at the commencement of employment or as soon as possible thereafter and consider using language similar to provisions which have been enforced by courts in your jurisdiction;

2. Provide adequate consideration to employees for all agreements;

3. Seek reasonable geographic and temporal limitations for non-competition covenants, if permitted under state law;

4. Obtain appropriate warranties (resume contents, original development, assignment of rights, etc.) from employees; and

5. Identify, liberally mark and use reasonable precautions to protect trade secrets and proprietary and confidential information.

Execution & Adequate Consideration for Employment Agreements

Employment agreements should either be entered into at the commencement of employment (just as pre-nuptial agreements should be executed prior to marriage), or thereafter in conjunction with adequate additional consideration, such as a material change of the nature or duties of employment. This employment practice was recently addressed in Rivendell Forest Products, Ltd. v. Georgia-Pacific Corporation, 824 F. Supp. 961 (D. Colo. 1993). In this case, Rivendell brought suit against its former employee, Cornwell, and Cornwell's new employer, Georgia-Pacific, for breach of a post-employment confidentiality agreement and misappropriation of trade secrets relating to Rivendell's computerized price quoting system. While at Rivendell, Cornwell supervised employees using Rivendell's price quoting screen to quote lumber prices to customers, but Cornwell was not involved in the development of Rivendell's quote screen software. Rivendell requested all employees, including Cornwell, to sign a confidentiality agreement more than a year after Rivendell employed Cornwell. Rivendell claimed that Cornwell assisted Georgia-Pacific in developing a quick quote system that borrowed heavily from trade secrets embodied in Rivendell's quote screen.

The District of Colorado granted defendants' summary judgment motion, holding that: (1) Rivendell's post-employment confidentiality agreement was void for lack of consideration; and (2) Rivendell had failed to state a claim under Colorado's Uniform Trade Secret Act. With respect to the confidentiality agreement, Rivendell failed to show that its former employee received any consideration, such as higher wages, a promotion or access to technical information, as a result of his voluntary execution of the post-employment agreement. On the trade secret claim, many of the concepts and ideas of Rivendell's price quote screen were well known in the lumber industry and Rivendell failed to demonstrate that its integration or implementation of the price quote screen constituted a protectible combination of concepts or ideas. The court noted that combinations of publicly available concepts and ideas which provide a competitive advantage are protectible as trade secrets. See e.g., Integrated Cash Management Services, Inc. v. Digital Transactions, Inc., 732 F. Supp. 370 (S.D.N.Y. 1989), aff'd, 920 F.2d 171 (2d Cir. 1990).

Rivendell's proprietary information was needlessly compromised by ineffective practices. Rivendell failed to obtain execution of an employment agreement at the commencement of Cornwell's employment. Rivendell then failed to offer adequate consideration to enforce the post-employment agreement with its employee. Finally, Rivendell failed to identify and mark its proprietary information and implement appropriate measures to protect it from unauthorized distribution or use.

Failure to Implement Employment Agreements

The absence of employment agreements will clearly not enhance protection of proprietary information or intellectual property assets. This fact was demonstrated in Western Forms, Inc. v. Foundation Forms & Supply, Inc., 824 F. Supp. 739 (S.D. Ohio 1993). In this matter, Western failed to implement any appropriate employment agreements with confidentiality and non-competition provisions for its personnel. After serving as Western's service manager for almost five years, defendant Raisch terminated his employment, removed copies of Western's actual customer list and prices, removed certain of Western's customer files that interfered with Western's ability to conduct business, and effectively shut down Western's operations in a spiteful, mean and malicious manner. Western sought a preliminary injunction against its former employee, Raisch, and his new employer to prevent their use of Western's proprietary information.

Noting that Western was entitled to have its trade secrets remain confidential and Raisch was entitled to compete with Western, the Southern District of Ohio held that Western's customer list and pricing information were not proprietary information or secrets. As a compromise, which may have been due to the extraordinary facts of this matter, the court preliminarily enjoined Raisch and his new employer for six months from doing business only with those companies whose Western's customer files were not returned to Western by Raisch. Western's failure to implement appropriate employment agreements and identify, mark and use proper precautions to protect its proprietary information was the exemplar of unfortunate business judgment.

Reasonable Limitations for Non-Competition Covenants

Unreasonable geographic and temporal limitations of post-termination competition are subject to careful scrutiny and potential repeated attack. These principles were illustrated in Kramer v. Robec, Inc., 824 F. Supp. 508 (E.D. Pa. 1992). In this action, the Eastern District of Pennsylvania: (1) upheld Robec's post-employment non-competition agreement which granted an entirely new employment status to Robec's employee; (2) found the entire United States to be a reasonable geographic scope, since competition in the computer market is worldwide and Robec marketed and distributed computer hardware and software throughout the U.S. and overseas; (3) barred Robec's former employee, Kramer, from working for Robec's direct competitor, Artisoft; but (4) modified the term of the covenant not to compete from three years to two years, due to the rapid pace of change in computer technology, computer products and the relatively short life of know-how and marketing strategies supporting such products.

In 1984, Robec and Kramer entered into an agreement to attempt to develop a commercially viable computer network system. In 1986 Kramer and several key employees working on the project became at-will employees of Robec. After Kramer was an at-will employee for more than one month, Robec and Kramer entered into an employment contract, which included the following non-competition covenant:

On termination of his employment, whether by termination of this agreement, by wrongful discharge or otherwise, employee, for a period of three (3) years after he has ceased receiving any compensation from employer under this agreement, will not engage, directly or indirectly, in any manner or capacity, as principal, agent, partner, officer, director, employee, joint venturer, salesman, consultant, corporate shareholder of more than ten (10) percent of the shares of any corporation, or otherwise, enter into or engage generally in any activity competitive with the business of employer in the United States of America.

Kramer, 824 F. Supp. at 510. The court enforced the post-employment agreement based upon a finding of adequate additional consideration, since the terms of Kramer's employment were fundamentally transformed by the guarantee of two and one half years of employment, terminable only for good cause, with six months severance by either Robec or Kramer. The guarantee of employment for over two years was a handwritten and initialed addition to the agreement. The court noted that the $1,000 consideration stated in the agreement alone may not have been adequate consideration to enforce the agreement. Robec's non-competition clause may be a useful model for businesses with employees in Pennsylvania.

Identify & Use Reasonable Precautions for Trade Secrets

Identify, liberally legend and use reasonable precautions to protect corporate trade secrets and confidential information. Stamp all trade secrets and confidential information with "trade secret" or "confidential" legends. Assert broad claims as to what constitutes corporate trade secrets and confidential information, since such broad designation or "overmarking" will not adversely affect valid claims. What constitutes "reasonable" precautions to protect trade secrets was addressed in Rockwell Graphic Systems, Inc. v. Dev Industries, Inc., 925 F.2d 174 (7th Cir. 1991). In Rockwell Graphics, Circuit Judge Posner stated:

But only in an extreme case can what is a "reasonable" precaution be determined on a motion for summary judgment, because the answer depends on a balancing of the costs and benefits that will vary from case to case and so require estimation and measurement by persons knowledgeable in the particular field of endeavor involved. On the one hand, the more the owner of the trade secret spends on preventing the secret from leaking out, the more he demonstrates that the secret has real value deserving of legal protection, that he really was hurt as a result of the misappropriation of it, and that there really was misappropriation. On the other hand, the more he spends, the higher his costs. The costs can be indirect as well as direct. The more Rockwell restricts access to its drawings, either by its engineers or by the vendors, the harder it will be for either group to do the work expected of it.

Rockwell, 925 F.2d at 179-180.

Protection of proprietary information and intellectual property assets requires some, but not extremely onerous, planning and judgment. Review the key employment practices and implement appropriate employment and/or confidentiality agreements at the outset of relations with all employees, joint venturers and independent contractors.

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Computer Law Strategist, October 1993