When it comes to Restrictive Covenants, employers are fighting to keep their company safe while employees may use them to their advantage. Keep listening to find out if the Employer or the Employee wins this battle.
A company’s trade secrets encompass a whole range of information and are one of the most valuable assets that a company can own and protect. Trade secrets are a vulnerable form of intellectual capital, so there is a big risk for the employers.
Non-Competes are not legal in all states, but in those where they are, they can be a significant advantage for employers. Employees, on the other hand, in the states that are legal may find it difficult to find a new job.
Good employees are hard to come by and employers who have them want to keep them. Non-solicitation agreements protect you from the harm that can be caused by a former employee poaching these customers or employees to a competitor.
Think of service providers, engineering firms, marketing companies, staffing firms, etc. In order to prevent clients from hiring away personnel, many service contracts contain “no-poach” provisions that restrict employees from being hired by another service provider.
A company has little to lose and much to gain by using confidentiality agreements. Confidential information plays an important role in business competitiveness and success. It is also necessary to ensure the protection of company trade secrets under state or federal laws.
Full Podcast Transcript
This is Legally Sound Smart Business where your hosts, Nasir Pasha and Matt Staub, cover business in the news and add their awesome legal twist. Legally Sound Smart Business is a podcast brought to you by Pasha Law PC – a law firm representing your business in California, Illinois, New York, and Texas. Here are your hosts, Nasir Pasha and Matt Staub.
NASIR: All right. Welcome! Welcome! Welcome! This is our 318th episode of Legally Sound Smart Business. It’s a big milestone. 318, of course, is very well known to be a pretty significant threshold. Once you pass that mark, you’ve made it, so we’re very happy about that.
MATT: I think that’s because my hometown area code is 317. We’ve hit that. Now, we’re above that, and we’re past all the previous parts of my life.
NASIR: That’s precisely correct. Of course, 318th episode – traditionally, we cover restrictive covenants. That’s something that’s been established for many years. And so, 318, of course, I should say restrictive covenants in general is something that everyone is interested in. It covers everything from non-competes to trade secrets to confidentiality – you name it.
Of course, at Legally Sound Smart Business, we like to take different perspectives. And so, today, we are going to split it up, Matt. One of us is going to take the employer’s perspective, and the other one is going to take the employee’s perspective. You’ll have to decide who makes the better argument – if it is an argument, I guess. But we haven’t decided which side to take yet.
MATT: Yes, we have to flip a coin, right?
NASIR: That’s what I have here. If you’re watching via video, I have my quarter. Is it a quarter? What is this? This is a quarter dollar, yes. I haven’t seen one in a while, I suppose. I feel like I haven’t even held a coin in six years.
NASIR: I can’t believe they still made this.
MATT: Definitely not.
NASIR: Definitely not true? You don’t know. I mean, if someone was trying to give me change, I don’t even touch it.
MATT: Refuse it? Yeah.
NASIR: I refuse it.
Let me do a couple of practice rounds here. All right. Should we just do you call it? If you get it right? Do you have a preference? Or should we just do heads one way, tails the other?
MATT: I do have a preference, yes.
NASIR: Okay. Well, I don’t know if I really want to know your preference. I’m going to do, heads, I’m going to take the employer’s side; tails, I’ll take the employee’s side.
NASIR: Is that fair?
NASIR: I feel like you should have said that because I don’t want to cheat.
MATT: Well, I mean, it’s 50/50.
NASIR: That doesn’t count. Hold on. Okay. Ready? Heads it is. What does that mean? I forgot already. I’m the employer, right? Heads.
NASIR: Well, very good. Yes, we’re going to cover all the various different restrictive covenants there are. Matt has volunteered to take the employee’s side, apparently, by a coin toss. I will take the employer’s side. We’ll break through each one and try to see how each party looks at this and the restrictions. What is enforceable? What is not enforceable?
Let’s start with our first topic which is trade secrets. I think we should first start out by defining what is a trade secret, Matt.
MATT: Yes, before I do that, I think the interesting thing about this is, on the employer and employee sides, there are going to be very big shifts between the two. I think I’m going to win some, and you’re going to win some, but it’s really going to be dependent on the restrictive covenants.
NASIR: That’s very doubtful. It’s going to be a clean sweep.
MATT: Clean sweep? Yes, for sure. We’ll start off with trade secrets.
Essentially, we get asked this question all the time. The way I like to describe it is by using an example. The example that I use most of the time is the recipe for Coca-Cola. I don’t know if it’s still the case, but at one point in time, it was very well documented that there were only two people within the company that had access to the recipe for Coca-Cola. They weren’t allowed to fly on the same plane – not that there are a ton of plane crashes, but that was a real thing – just in case a plane went down and both of them were on it. No one would know what the recipe is at that point.
NASIR: Under that logic, they shouldn’t be in the same car either.
MATT: Right. Exactly.
To summarize, it’s information that is not disclosed publicly or to any outside party. One of the key components – and it’s in the name itself – is the secret aspect. Once you disclose that, it loses that secret aspect of it, and doesn’t become a trade secret anymore. You really have to be careful on who you disclose this information to. I gave an example of a recipe, but there are other examples as well. You can put a bunch of different items under the definition of a trade secret. Again, the key is the disclosure piece because that’s part of the definition of a trade secret.
NASIR: We want to distinguish a trade secret with other things – for example, a patent or a copyright – because those are things that, in order to maintain the enforceability, you have to disclose what the invention is, if it’s a patent, or what the actual work is, if it’s a copyright.
NASIR: Obviously, if you want that protection and you’re disclosing it, then it almost defeats the purpose of a trade secret because you don’t want anyone to know. Now, I’m sure you can Google out there. People have backward engineered what the recipe of Coca-Cola is. But, of course, with the actual subtleties and nuances of it all, I personally am a Pepsi fan, but that’s just because I like the formula.
MATT: I actually did have a book I was given as a kid. It had a bunch of “secret recipes.” Coca-Cola was in there and then a bunch of restaurants. I don’t know how. I mean, that was however many years ago. In today’s day and age, you can probably figure it out pretty quick if you really wanted to, but you made a good point.
It’s not like a trademark or a patent or a copyright which you publicly file and is public record. Like I said, it’s in the name itself. It’s trade secret. It’s something that’s not disclosed to the public at all. We’ve talked about Coca-Cola. It reminds me of a story I saw recently – a lawsuit, actually – that dealt with Coca-Cola, but not in the sense of the actual recipe itself. To me, this was pretty interesting. It dealt with the actual lining of the cans that were sold for Coca-Cola. What is it? BPA-free? I think I’m getting that right.
NASIR: I don’t know what that stands for, but I know I don’t want it.
MATT: Well, you see that with all the water bottles and things of that nature. I guess they expended some significant amount of money – I think it was nine figures – to develop this can that was BPA-free. Obviously, considered a trade secret because it was kept within the company. It was only disclosed to a handful of people. And then, one of the employees – obviously, you can figure this out – disclosed that information to another party. It resulted in this lawsuit and basically unauthorized disclosure of trade secrets.
NASIR: Right. As an employer, of course, I want to make sure that anything we develop as a company – or is our client’s development as a business – stays in the business. I’m sure that money that was spent to develop that technology and the know-how on how to do that took time, effort, and expense. Our clients, as an employer, should reap the reward. Very simple. And so, trade secrets need to be kept confidential.
MATT: At the top, I said some of these might be difficult arguments for me, but I have a pretty easy answer to this one. If you don’t want me to disclose the trade secret, just never tell me in the first place, then I have no possible way of disclosing what those trade secrets are. Like in the example I gave with Coca-Cola, you know, if you don’t show me how these BPA-free cans are made and all the logistics behind it, I can’t disclose it to an outside party because I just sheerly don’t know.
NASIR: Hmm. Yeah, but what if I need you – I mean, I’m hiring the employee to be part of the business. How do I keep them separate? I don’t know.
MATT: Yeah, it depends on what my role is as well, but as an employee in general, the reality is, I think, the vast majority of employees are never going to be privy to trade secrets of a company, but I’m looking at this from the perspective of a high-up employee. I guess you just never should have trusted me in disclosing that information as the employer.
Going back to the other Coca-Cola example, there’s a reason there was only two employees in the company or two executives that were given that knowledge of what the recipe is because it’s only a small amount that you can trust. I realize I’m also opening myself up to a lawsuit. That’s not great for me.
NASIR: All I know is I can’t trust you.
MATT: Yeah, this is the hill I have to stand on as an employee. If you don’t want the trade secrets disclosed, you just can’t tell me.
NASIR: Sorry. I know I’ve got to stick to the employer, but I’m just trying to think a little bit. An employee could argue, “Well, is it really a trade secret? Why do we need to protect a trade secret? What’s the big deal?” because this is a free market. Coca-Cola develops a product that doesn’t have BHP.
NASIR: BPA. And so, that’s great. Okay. If everyone else learns from it, then that’s good. We’ll have all these BPA-free cans.
MATT: Yeah, though there’s definitely some benefit there. That’s part of how I see it as the employee. Let me look at it from the perspective of a customer list, for example. It can be considered a trade secret but, at the same time, I have to know who our customers are in order to do my job as the employee. It’s probably not that difficult to even figure out who those customers are. The customer could disclose that information as well. Are there truly even trade secrets in a lot of these examples? I would argue, no, and it’s easy to get out of those bounds of a trade secret.
NASIR: Yes, you’re referencing customer list. A very common trade secret – at least from a company’s perspective – is a customer list. And so, the customer list of – let’s say – Coca-Cola is a little bit different than the customer list, for example, of another service-based industry. At the same time, even Coca-Cola’s customer list could be considered a trade secret.
For example, if we developed a list of all the head contacts of each of the sports stadiums in the country. I know their phone number. I know what their email address is. These are all the decisionmakers, for example, of each of these sports facilities on whether to carry Coke or Pepsi products at their facility.
Now, obviously, what that list is, what it’s made of – all sports facilities in the country – anyone can do that, but actual specific names of the people that make these decisions, their phone numbers, email addresses, and these kinds of things, this becomes confidential information – or at least a trade secret – even if those individuals may be public knowledge in the sense that, by compiling it into one location, the work that we put in to actually compile that list, now all of the sudden, it has a little bit different value than just looking up someone’s phone number online or email.
MATT: Yes, and not to speak to either way, but another big one would be pricing with companies as well. There are very specific instances of when an employer or a company doesn’t want to have other parties know what their pricing is. This is particularly in competing for different bids and things of that nature because they want to come in competitively, and maybe that’s their competitive edge over another company that’s also bidding. But, as the employee, I would say, “I don’t think that’s fair from my perspective.”
NASIR: By the way, I do think saying it’s not fair is probably the best argument you’ve made. My five-year-old is actually pretty good at making that argument as well. Okay. Let’s go to non-competes. This is where I think employees may have some real position here.
Non-competes comes in various forms. When it comes to the employer-employee context, it’s usually upon termination or even during the employment. First of all, during employment, you can’t work anywhere else but here. It’s a simple broad non-compete. Or you can’t work anywhere else competing with us.
But most of these non-compete restrictive convenants that are applicable for conversation is post-employment. Within two years after termination, you are not to work anywhere – whether as an independent contractor or owning an establishment that competes with our business within a hundred-mile radius or within the entire United States. It could be two years. It could be five years. It could be forever. These are the options. Employers need to be able to restrict their employees from competing against them as soon as they’re terminated.
MATT: I cleared my most difficult hurdle with the trade secrets. Now, these are all going to be easy ones for me. This is probably the easiest one – the non-compete. As the employee, it’s all about work mobility. I can agree that, during my employment, I shouldn’t be competing with the company I’m working for. I think that’s a fair ask.
NASIR: You better not be.
MATT: But post-employment, you can’t restrict my ability to work.
Just to follow up on what you were saying, typically, we’re talking about three different types of restrictions – geographical scope, the time period restriction, and then what’s considered a competing business. All three of those together, it’s just very difficult for me. I leave, get terminated, or what-have-you. It’s very difficult for me to find another job, particularly if all I know is one set of skills, and I’m not going to move and uproot my family, and I’m not going to sit around and be unemployed for one, two, however many years. That’s patently not fair to me as an employee.
NASIR: I like the idea of hiring you for a month and then not allowing you to work for the rest of your life. Just in the United States. If you want to move to a different country and do something else – again, so long as it’s not competitive – that’s fine.
MATT: I was going to say, I think even in Texas that wouldn’t be perceived as reasonable. Even in Texas, unfortunately.
NASIR: Even in Texas? Okay. Well, let’s talk about that. As an employer, depending upon where my employees are and what law applies, it governs whether non-competes are enforceable or not.
We like to generalize very simply. In California, you pretty much can’t do them, especially in the employer-employee context. There is pretty much no way around competing. There’s some ability to restrict with confidentiality and trade secrets but, again, if it gets too much into a non-compete kind of scenario, then it’s not going to be enforceable.
As an employer, I’m just not going to employ anybody in California. I’m leaving that state. No problem. Here I am in Texas. Look, I spend money training these employees, giving them access to frankly all this know-how and how to do things and how we run our business. If I spend this time and money training them, then a year later, they just go off and start competing against me, then how am I supposed to run my business?
Reasonable restrictions – okay, I concede that it shouldn’t be unlimited, but reasonable restrictions should be allowed because we have to create a market where employers have an environment to be able to grow their business and I want to be able to be candid with my employees and produce a great product or service. In order to do that, I have to have some protection.
MATT: I can see the argument of “don’t take the money and run.” You know, you dump in a bunch of training. I learn things. That’s fine. But my argument would be, I mean, give me an offer I can’t refuse to leave, you know, if that’s really the concern. If I’m a key employee, there shouldn’t be a situation where I would even want to leave. I would want to continue working for this company. If you present an employment that’s not competitive to other similar lateral jobs, I should be free to leave and do whatever I want within the same space, within the same city the day after I leave is how I view it, and I’m in California. Like you said, it’s an easy argument.
NASIR: There’s some irony of a company asking for these kinds of restrictions to restrict their competitiveness when, also, of course, it’s the free market and competition that also creates an environment that allows us to operate as a business the way that we do. And so, there is some irony.
But, at the same time, look, if I’m in it for myself as a company, I’d want to restrict the competition as much as possible. I think this argument from an employer’s perspective gets more and more strong as you go up the ladder in seniority of management and things like that. We’ve seen non-compete issues come in the news, especially when it comes to lower-level employees. I’m trying to remember some of the things that we’ve come across, but all the big companies – everyone from Amazon to Jimmy John’s and these kinds of things – have some kind of forms of non-competes in different states at different levels, but if you’re restricting your so-called lowest-level employee, it does beg the question as an employer.
“What is the real benefit of restricting a sandwich maker from going from Jimmy John’s to Subway? What is it that they’re learning or getting trained on that somehow you’re losing out on?” whereas, if you hire some kind of marketing manager or someone at a critical part of your business where, if they were to move next-door or start their own business or start working for a competitor, the immediate result would be hurting your business. The immediate result would be everything that you’ve kind of invested in that employee will come back to bite you, so to speak.
I think most people would agree that, in those cases, there needs to be some restriction which is why I think California takes too extreme of a position by prohibiting them altogether. That’s why even where states have started to restrict non-competes, the prevailing compromise is that no non-competes below a certain wage earning. That makes sense to me because people need to make a living, but at a certain point, if you’re a high-wage earner, then the restrictions should be much more flexible.
MATT: Right. I think it was Jimmy John’s who was in the news a couple of years ago about trying to restrict. I don’t think it was even managers. It was just the day-to-day employees – the “sandwich makers.” It was very broad. I forget how they defined it, but it was something like making any sort of sandwich within this X-mile radius. I could see that argument. That’s obviously ridiculous.
NASIR: I could see they get hired by a daycare. It’s like, “Look, I can’t make any of the kids sandwiches.”
MATT: Yes, that could arguably fall under that definition with how broad it was.
I still disagree with you, but what you could lean on – going back to our first subject, trade secrets – I think you mentioned that confidentiality, things of that nature is what you would lean on in these situations. Otherwise, there shouldn’t be a real argument of why I can’t leave a job and go work for another company. I can leave your work at Pepsi – since you’re the big Pepsi fan – and go work for Coca-Cola. That shouldn’t be allowed.
NASIR: Okay. That’s non-compete. Let’s move to non-solicitation – very similar to non-competes in that it is a post-employment restriction that is pretty common, but similarly also has some of the same kind of restrictions that you would have as non-competes. Again, for example, California is very limited on how you can implement non-solicitations.
Why don’t you give an example, Matt?
MATT: Well, there are a few different examples. We’re talking about the employment context, but you’ll typically see mutual non-solicitations and B2B transactions as well. Any time a company or a business has access to the other company’s employees. From the employment perspective, the concern is I’m the employee. I leave. I start my own company or maybe work for another company. I come back and then solicit the clients of my previous company or vendors or other employees. I forget if that was handled or if we’re going to talk about that later on. Let’s talk about the clients.
I can’t leave Company A. Or this is what I’m being told I can’t do. I can’t leave Company A to go work for Company B and then go back to the clients of Company A and try to get those clients to come over with me to Company B. That’s the main example I think of primary concern. But, like I said, the suppliers, vendors, other parties can also fall under that non-solicitation.
NASIR: Again, you see how each of these restrictive covenants kind of tie into each other. We talked about trade secrets with customer lists. We talked about non-competes. An example I gave is a marketing director. Here, we’re at non-solicitations. If I don’t get my customer list, if I don’t get my non-compete, at the least from a non-solicitation perspective, if you leave the company, you can’t just go through your Rolodex and start calling all my clients, asking them to jump ship. You’ll destroy my business. By hiring you, the whole concept is that I’m giving you access to all these contacts on our company and our dime for you to develop those relationships only to turn around and steal them from us, that’s not fair.
MATT: I think this is another easy one for me, to be honest. If we’re talking strictly from the customer standpoint, I’m the one that either brought this customer on for the benefit of the employer, or I’m the one that cultivated that relationship with the customer – so much so that I’m such an integral part of the company. I was the key personnel with this customer. If they want to work with me, that’s fine. It doesn’t matter what company I’m working under. They’re choosing to work with me as the employee. It doesn’t matter what company I’m with. I should be able to keep my clients – no matter where I go.
NASIR: I just thought of something. What I’m going to do then, if I can’t have my non-solicitation, then I’m going to require my clients to not be allowed to do business with you. Imagine that alternative – asking my client, “Hey! Thanks for becoming a client! By the way, in case an employee leaves, you can’t work with them.” Imagine having that. Of course, we’ve seen them, and we’ve probably drafted them too, but this is the kind of scenario that would happen if I’m not allowed to prohibit former employees from soliciting my clients.
MATT: Yes, I agree with you. My view on that is, at the end of the day, the client is going to work with whoever they want to work with.
NASIR: That’s true.
MATT: I think you’d be very hard-pressed to enforce anything like you’re proposing. Even in states that are more favorable, those are the arguments. But I was making the comment before on the employee side, but I think there is a lot of truth in that it’s a responsibility of the employer to have that entire company relationship with the client and not just one person who’s the point of contact that does everything because we’ve seen that so many times, right?
MATT: With clients, they’ve had key employees leave, and then they immediately get concerned that they’re going to lose clients, and they do sometimes. It just depends on the system you have in place as the employer to make sur that you don’t lose those clients and you have to show that you signed up for this team – not this one person that’s not going to be able to handle everything for you by themselves – because we’ve seen that. I’ve been talking mostly from the perspective of going from Company A to Company B, but we’ve also seen it from the perspective of somebody leaving the company and starting their own operation.
MATT: In this example, I definitely could do that because I’m a very good employee, and I can be a business owner, but sometimes that’s not always the case because employees that go off and start their own thing don’t have the systems in place a lot of times. They don’t know all the little things you need to do, so it’s easier said than done, but not for purposes of this argument because I can do all those things.
NASIR: When it comes to non-solicitations, we’ve seen different scenarios where even if you have an enforceable non-solicitation, it’s not as easy – even if it’s enforceable – to actually do it and put yourself out there because just think of the prospect. You’re talking about suing a former employee that is soliciting your possibly former or current clients, right? From your client’s perspective, it’s not good optics.
But, of course, a lot of these things, by the way – a lot of these restrictive covenants – sometimes, just putting them as restrictive covenants in the agreement or having an agreement down in the first place is a deterrent factor which is why, of course, in certain states – like California – even asking your employee to sign a non-compete can bring some legal issues and liability. Even if you know it’s not enforceable. Asking them to do so, or terminating them, or refusing to do so can have some significant consequences. It’s a tough world for us.
MATT: I was going to say, we’ve done it strictly from me reaching out to the clients – the customers – but what if I leave and – there’s a lot of grey area in there; it could probably be its own episode by itself – the customer somehow finds out about it, and they reach out to me. At that point, I’m not soliciting the customer. They reached out to me. But we’ve seen a lot of different variations of that, obviously.
NASIR: We’ve seen it where you get an auto-response from the email saying, “I’m no longer with this employer. You can reach me now at…” Is that solicitation?
NASIR: Also, there are some industries – everything from financial advisors or even attorneys and these kinds of professional services – where it is the expectation that, when a key person leaves, there are going to be certain clients that go with that person because it’s the nature of the business. The relationship is with individuals – not as an organization. Again, that’s just common.
How practical is it to take away that non-solicitation when, as soon as that person leaves, their clients are probably going to leave anyway? And so, a lot of times, it’s like, “Former employee, you can say certain things – like, ‘I’m going to do this,” – but you can’t take any files with you. You can’t disparage us – things like that that may give some kind of protections to the employer.”
MATT: Yes, I think the financial advisor is a very good example. Another one that comes to mind is the mortgage industry. I don’t know. I’m sure they still are doing this, but you’ll see lenders basically, if they work for one company, they take their book of business and go to another one because they’ve actually given some sort of financial incentive to then pull their book of business over to this other company.
Employers have to do a good job of saying, “This is our company property,” and things of that nature but, again, it’s easier said than done. At the end of the day, if the customer wants to work with this one person, they’re going to work with them. It depends on the services and industry and all that. I think your financial advisor example is good. It’s like, “Well, I’m not going to switch financial advisors if you’re doing a good job and just go to somebody I don’t know.”
NASIR: That’s right, yes.
MATT: Expectations. But, in this case, part of my argument is I did all the good work, so I should be allowed to do it.
NASIR: That’s non-solicitation of clients. You alluded earlier there’s also non-solicitation of vendors, of employees, of contractors. Sometimes, you can call them non-poaching agreements. I suppose poaching vendors is probably not as much of a thing as poaching employees, but what about that? We’re handling it separately, right? I think a non-solicitation of a client is different from a non-solicitation of employees.
NASIR: Even California makes a distinction between that kind of restriction.
MATT: You’re right. I think the vendor, supplier, or another third party like that, unless there’s some exclusive relationship, this is not going to be a huge deal in my opinion, but the non-solicitation of employees? Well, I’m not going to be bound by that. I shouldn’t have to because I can just go to LinkedIn and figure out where somebody works just because I was working with them before and knew that they worked there. You know, I can find an outside recruiter and have them reach out to whoever these employees are for the previous company. I don’t think that’s very fair either.
It goes back to the non-compete aspect. It’s worker mobility. Employees should be able to have freedom with where they want to work. If they want to leave and go somewhere else, they should be allowed to do that. If I help them out, so be it.
NASIR: Fine. I hear you. But I feel like I’m actually arguing, but not really. If you’ve been in business for a while, you all know the incredible negative effects that one bad apple can have on the culture of the office. No one’s perfect, but even in cases where the employer is outstanding, a bad apple can ruin a workforce, ruin a staff, ruin a department, and just bring everything down.
Now, imagine that bad apple not only does that but then leaves and starts poaching these employees from you. The damage just gets exasperated, and they were only able to do that because of this negative energy that they brought to the department. They brought everything down. They leave. They start poaching. It’s not like they “earned” the right to be able to extract employees that they’re coming from a third-party recruiter and stuff like that. They’ve developed relationships. They’ve used that time at the company to basically damage our name in front of the employees. Therefore, we need to have some kind of restriction that’s enforceable to prohibit that from going on. That’s also a matter of fairness, you know.
MATT: I think the example I could agree to, and we had to talk about it, I guess. It wasn’t even planned. Michael Scott Paper Company, I mean, he’s the manager of Dunder Mifflin. He puts in his notice. And then, he openly starts soliciting almost every employee there, trying to get them to work for his new business.
NASIR: While he’s still employed.
MATT: Yeah. Well, that’s what made me think of it. I can get behind the example of the employees. I mean, we’ve had examples even worse than that. We’ve had people that haven’t even put in their notice, but they know they’re going to leave the company, and they start recruiting other employees within the company and saying, “Hey! I’m either going to start my own business or go here. I would like to take you with me. Is that something you’d be interested in?” I draw the line there. I can’t make that argument from the employee’s perspective. But if I leave and I want to reach out to somebody that I’ve known for X amount of years because I know they’re a good employee, I should still be allowed to do that.
Again, going back to what I said earlier, as an employer, if you can’t offer competitive pay, benefits, culture, location, what-have-you, then it’s just fair competition.
NASIR: I’m just going to fire everybody. Make it easy.
MATT: Well, hopefully, you have non-solicitations for the clients.
NASIR: Let’s talk about the last one. Now, this has to be a slam dunk for the employer. That’s confidentiality. I’m going to talk about this in the perspective of the attorney client privilege because it’s a perspective that we’re very familiar with. Hopefully, I can have you empathize with that from your perspective.
An attorney has a legal bound. I should say an attorney is legally bound to protect the confidential information – or any communications, frankly – that a client gives to his or her attorney. The reason why that is a very closely held restriction covenant between the attorney and client is that you want to make sure that the client is completely comfortable in being candid in all the information that they may have so that they attorney can represent the client properly. That’s the whole concept. It works out very well because, that way, if a client comes and tells you, “I have a dead body in my trunk,” even to that extent, that kind of communication is protected. But that allows the attorney to say, “Well, you’ve committed a crime – assuming that you caused that dead body. Let’s figure out what to do next.” Of course, as attorneys, we have these conversations with clients. We want them to be candid with us.
What’s my point in all of this? It’s not the same between attorney and client, but there’s a similar concept between employer and employee. If I’m going to run a business, in order to be successful, there needs to be some level of trust between that employer and employee. In order to build that trust, there needs to be a restriction of exposing confidential information to at least a reasonable extent. By hiring that person, exposing them to this information, I don’t want to be bitten as soon as I terminate that employee and that employee goes off and discloses all my so-called skeletons in the closer.
Remember, everyone has weaknesses. Everyone has things that they don’t want other people to know – their competitors, the public, the customers. There’s nothing wrong about that. I can draw a line when it comes to confidentiality if the employer is doing something illegal and the employee is so-called whistleblowing. That’s a different issue compared to – what’s an example of confidential information that I don’t want anyone to know? I can’t think of anything. I’m an open book.
MATT: Well, this plays into my argument. It sounds like you don’t even have any confidential information. What’s even considered confidential if you don’t even know anything that is? I would argue, as the employee, that there’s nothing that’s even confidential because it’s all stuff that any other company can find out if they really wanted to.
NASIR: Well, I’ll be thinking of an example.
MATT: Let me say, the one thing I can get behind as the employee – sorry, hold on – now, I’ve lost my train of thought. Okay. Sorry. I flipped it.
To me, there are varying levels of confidentiality, particularly in California. This was under the Silence No More Act. Initially, there were certain issues of sexual harassment that were able to be considered “confidential” when an employee leaves, but they have since expanded that to include any forms of harassment or discrimination based on a protected class.
NASIR: This is for California, right?
MATT: For California, correct. I think, as the employer, you can even agree that that is fair and reasonable that that’s not going to be considered confidential that there was some sort of workplace harassment or discrimination on any sort of protected class level. I think we can at least agree on that, right?
NASIR: Well, okay. Here’s the employer argument. Look, just because there are allegations, and even if the employer decides to settle, and even if the employer and maybe someone in the company acted inappropriately, the damaging effects that that could have if that went public is far greater. By the way, this is the argument. Give me some leeway here. This is the argument that an employer would have.
MATT: This is your slam dunk case.
NASIR: Yes, that’s true. The damage from just the thought that this company had a sexual harassment issue, it’s a scarlet letter in itself that people make some assumptions of what happened which may or may not be true. Also, frankly, it’s like there are many instances – it doesn’t mean that there is a majority or a minority, but there are many – where employees make allegations that are not true.
Of course, as business corporate attorneys, we encounter this all the time. Of course, there are always two sides of a story, but I’ll tell you that, regardless, the employees in many states have a lot of power to really mess with small businesses. On one hand, there are valid protections for employees, but a bad actor employer should be punished. Similarly, a bad actor employee often can take advantage of the system itself and cause the employer legal fees, et cetera.
My point is that, by keeping the confidential under this new law, that in itself can have some further harm to bad actors that are employees. Or former employees.
MATT: Hmm. It sounds like you’re trying to suppress allegations made. Your slam dunk is not going in. People don’t often miss the slam dunk, but I think you clanked it off the back of the rim. It flew right up in the air, unfortunately.
NASIR: I guarantee you, if I attempted a slam dunk right now, I’d definitely not do well – even if the rim was lower.
MATT: Fair enough.
NASIR: That’s what I meant by that analogy.
MATT: I’ll give you a little bit of leeway. I can agree to confidentiality in general. I mean, I think that’s a fair ask. Like you said, from the employer’s perspective, they have to trust the employees. There should be some form of trust there – some loyalty between employee and employer – going both ways.
Obviously, there’s information that the employee is going to become privy to. It’s going to be important for the employee to have that information, so they can make the employer more productive and grow over time. In theory, I can get behind it – although your blanket attempt to not allow me as the employee to disclose anything that you want to consider confidential does not seem fair at all.
NASIR: That’s a fair point. As you develop these agreements and these definitions of confidential information, you start to see how you can narrow or broaden the definition. I think there may be a category or box if we’re talking about the California law when it comes to harassment and these kinds of things that are not considered confidential information.
But, on the other hand, if there are things like, “Hey! I plan to enter into this geographic market next quarter,” and my employee leaves and then tells the world before I even attempted to do that, or I always negotiate these kinds of contracts with this vendor, and this is how I do it, and the reason I’m able to do this is because I use this other vendor over here to put them against each other – all of these different kind of nuances that are in any business over time.
Those things should be kept confidential because that information can be hugely detrimental and I’ll have an unfair advantage – or disadvantage, I should say – because, if that employee goes to another company, divulges that confidential information, it’s not like I’m getting the same back. It’s not like it’s an open market where this information is being freely flowed to everybody. I’m getting disadvantaged by hiring that employee – frankly, that bad actor that wants to share all my secrets.
MATT: Those were good examples. One scenario we haven’t discussed which I think is a good argument for the employer would be the situation of the employee gains confidential information of a client or a customer of the employer because a lot of times there’s going to be confidentiality terms within whatever contract the employer has with this client. Oftentimes as well – at least we usually recommend it, or I always do at least – the employer is going to be liable for breach of those nondisclosure terms of confidential information as a result of its employees.
I think that’s definitely fair from the employer’s perspective of “Look, we’re putting ourselves on the line for you; we’re liable for breach of nondisclosure terms by you as an employee. You can’t be going out there and disclosing that information of these third parties, i.e., our clients.” I think that’s fair. The rest? I think I easily won. I actually threw it off the backboard to myself and did a 360-slam dunk.
NASIR: I’m trying to figure out a sport analogy. I don’t know if one exists. In fact, the closest one I can think of is quidditch in Harry Potter which, of course, is fictitious which is I have a secret argument that I’ve been saving up that will trump everything. Isn’t there in Quidditch, you get the ball in the hole and then basically it’s 100 points?
MATT: I never saw the movies. I’ve never seen any of them.
NASIR: I am going to get some hate mail from Harry Potter fans, I’m sure.
Here’s what I’ve been saving. This applies to all restrictive covenants that we’ve discussed. In this country, we have what is called the freedom of contract. It is an inherent right given under our constitution that, if two parties agree to terms, then that is an enforceable agreement, and it is not the so-called business with anyone else to tell us otherwise.
In this case, if I hire an employee under certain terms – that they can’t divulge trade secrets, that they can’t divulge confidential information, that they can’t compete against me, that they can’t solicit my clients, my customers, my vendors, my employees – and they agreed to work with us under those conditions, it should be enforceable. If they don’t want to agree, then they don’t have to work with us.
MATT: Well, I think we’ve each presented good to decent arguments – depending on who you’re viewing. We definitely want to know what the listeners think as well. We had a fun time the last time we did this – California versus Texas. Obviously, this time, we’re pushing our bounds on what we may believe or advise our clients at certain times, but hopefully it was a fun experience for the listener.
NASIR: Yeah, it reminds me of what’s going on right now with the great resignation – this anti-work movement. To take off my employer hat, conversations that have been going on in the last two years when it comes to these kinds of things have definitely started to move legislation in certain ways. We talked about the non-compete law. Just in the last three to five years, multiple states have restricted non-competes to low-wage workers. To be frank, that kind of restriction makes sense. It’s a good compromise. I think there are other things like that with the California law when it comes to harassment, when it comes to prohibiting companies from hiding these kinds of things that are going on in their company, especially if it’s pervasive. It makes sense to not allow them to hide those things.
Now, did California go a little too far? Probably. There might be a balance in-between. We’ll see how other states deal with those issue. But that’s one really cool thing about our country. Each state is different. It matches – or at least it’s supposed to – to each population, the different kinds of cultures there. We talk about California versus Texas all the time. Texas, obviously, here’s much different than it is in California as it applies to these things. Other states have their own color of how they deal with it.
MATT: That’s right. That’s all very true. The challenge for us is figuring out what states everybody is in and guiding them on the laws accordingly because, like you said, there are two things – one, the rules are different in every state, or they can be. Two, it’s ever-evolving and slowly shifting towards – well, some states slowly, some states quicker – the employee side. Like you said, I think the great resignation reference was apt because there’s clearly been a shift in the last year of employer versus employee control. At the end of the day, employers ultimately are the ones running things, but employees are gaining more say, more control, more freedom, obviously too. It’s definitely something that you just have to give. If you’re an employer, it’s something you just have to keep in mind all the time. It’s not a good change.
NASIR: Well, on that note, thank you for joining us, everybody! That’ll finish up our episode. Make sure you follow us on social media. We cover not only big topics like these. We also give different legal updates throughout the week, so definitely follow us on Instagram, LinkedIn, Facebook, and listen to us on Spotify.
MATT: Very good. Yes, as always, keep it sound and keep it smart.