Editor’s Note: Norman J. Leonard is a member of the Intellectual Property and Creditors’ Rights Practice Groups at Ward and Smith, P.A.

You have a great idea for a product or service and also dream about putting that idea to work and starting your own business. Once your dream has become reality, however, and your business starts to grow, it will not be successful for very long if you don’t pay attention to certain fundamental legal protections.

Special People; Special Knowledge

As your start-up expands to a mid-sized business, your great product or service becomes only part of the story. Hiring and retaining talented, dedicated, and loyal employees will be vital to both your production and your sales. Relationships with knowledgeable and trusted suppliers of raw materials will be indispensable to maintaining your product’s consistent quality. Marketing, whatever the strategy, will be necessary to get the word out. This all will involve a great deal of your time, sweat, and more than a little money.

The Problem

As the owner, you may worry that your best tradesperson, manager, or head assistant will accept employment with a competitor or leave to start a similar business, using the knowledge and skills learned from you and your operation to compete against you. You might worry that your top salesperson will go to work for a competitor and exploit the contacts made and knowledge gained while working for you to take your business’s market share away from you or to disparage your reputation. So how could you protect all that hard work and hard-earned reputation?

Covenants Not to Compete (Non-Compete Agreements)

You will spend time and money in recruiting, training, and promoting employees. Certain employees may be trusted, highly skilled, and creative. In addition, you will give your employees access to your business’s most confidential product information and help them create and sustain valuable relationships with your suppliers. Putting their skills, knowledge, and relationships to work for a competitor, or for themselves in competition with you, is not what you will have bargained for when you invest in their careers. As a result, it is not unreasonable for you to ask for some protection in return for your investment in them.

Your salespeople also will be invaluable to your business. Talented salespeople will drive your growth as much as your marketing plan or the quality of your product. They will help get your quality product into the hands of the consumer for the first time. But the quality of your product and its success in the hands of a retailer earn your salesperson as much trust and credibility as will the salesperson’s own natural ability and personality. After gaining respect by selling your quality product, learning everything there is to know about your customers, and developing a relationship with your customers on company time, would it be fair to you if your salesperson strolls into one of your customers’ establishments a few months later, eager to convince them that your competitor’s product is just as good, or better, than yours?

In both situations, reasonable non-compete agreements can be instrumental in avoiding problems.

Limitations on Non-Compete Agreements

In North Carolina, non-compete agreements are enforceable if employees are required to agree to only those reasonable restrictions on their future employment that are necessary to protect their former employer’s legitimate business interests. Protection against the misappropriation of both customer relations and trade secrets (discussed below) by departing employees are recognized as legitimate business interests justifying such agreements.

However, the restrictions must be reasonable in duration, territory, and scope in order to be enforceable. Reasonableness will depend on factors specific to your individual business and the duties of the particular employee involved. You will need to take into consideration your method of manufacture, market, range of distribution, and business plan, as well as the particular employee’s own specific knowledge, skills, and interactions with your customers or suppliers to craft an enforceable non-compete agreement that will actually serve your legitimate business interests.

The Requirement of an Actual Reciprocal Benefit to the Employee

Your non-compete agreement must include a reciprocal benefit for your employee over and above mere continuation of your employee’s employment. This means that your employee must enter into the non-compete agreement prior to, or contemporaneous with, being hired, promoted, or granted some other new benefit (such as a raise) in return for the agreement not to compete. An agreement to continue employing the individual without some new benefit is not enough. Critically, the agreement must be in writing.

Trade Secret Protection

While you may not have a patentable product or process or one that is worth the time and money to patent, you probably do have recipes, processes, customer information, and ways of doing things that have cost you time, money, and sweat to develop, and that give you a competitive advantage.

North Carolina law protects such so-called “trade secrets” from misappropriation by others. All types of business or technical information (including formulas, techniques, methods, patterns, programs, processes, devices, or compilations of information) may be the subject of trade secret protection. The information must have commercial value derived from the fact that it is generally not known or readily ascertainable, through independent development or otherwise, by others who can obtain an economic benefit from its disclosure or use. You may be surprised to learn that a trade secret can be protected even though the very same information also has been developed or used by others. “Misappropriation” will simply require the acquisition, disclosure, or use of your trade secret by getting and taking it from you without your consent. Your competitor will be entitled to acquire the same information by independent development or reverse engineering, or from someone with the right to disclose it, but will not be entitled to get it from someone to whom you have entrusted it for your benefit. This is so even though you may have a non-disclosure agreement with the person who wrongfully disclosed or acquired the information.

The Duty to Protect Your Trade Secrets

Importantly, however, you, as the “owner” of the trade secret, must be able to prove that you took steps reasonable under the circumstances to identify your trade secrets and maintain their secrecy.

You must take the time to identify your sensitive trade secrets beforehand and make their confidential nature known to your employees, agents, contractors, or anyone else to whom you confide. Otherwise, they, including the employee who leaves your business to go to work for a competitor, may not realize that you expected confidentiality, or even that you regarded the information as valuable. But, identifying that which makes your products and services unique and desirable, or that simply gives you a competitive advantage in the marketplace, only begins the process of its protection. You must take steps to ensure that the information remains confidential and that those entrusted with the information understand that you expect it to remain so.

Conclusion

A properly designed non-compete agreement, tailored to your business’s specific needs, can protect you from a loss of business and costly litigation later on, while also notifying employees, up front, that you expect some measure of loyalty in return for their training. Furthermore, with a plan in place and the expectations made clear, valuable business information can be protected as a trade secret and employees will think twice before choosing to exploit your investment and innovation for their own, or someone else’s, advantage.

© 2011 Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Norman J. Leonard practices in the Creditors’ Rights Practice Group. Comments or questions may be sent to njl@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.