Replacement Contractor: Companies get ripped off all the time when employees leave to start a competing operation. In your work with home improvement companies, typically how many owners or managers are aware that their processes — scripts, contracts, price lists, etc. — are or can be trade secrets, and do many define them, in writing, as such?
D.S. Berenson: A lot of them do it. They just don't do it correctly. It sort of gets back to everything else that's been plaguing the industry for so long. Companies use contracts they got from somewhere else that no attorney has ever looked at. Or they use marketing materials that have never been legally sanitized or, when it comes to trade secrets or proprietary information, they may not have agreement in writing with the worker at all.
RC: How would an owner distinguish between generic procedures that every company uses — how to canvass, how to present a product in the home — versus those that are a company's intellectual property?
DSB: That's the meat and potatoes of the problem. There is a misunderstanding in our industry when it comes to trade secrets. It's generally defined under state law to mean a particular process or design. To prove something is a trade secret is somewhat burdensome. To say something is a "trade secret" is not the same thing as saying it is confidential or proprietary. Generally speaking, something can be a trade secret and considered as confidential, but you have to take steps to keep it confidential.
RC: How does a company owner spell those things out in a way that prevents someone from walking off with that information?
DSB: What happens is that people typically have agreements that define everything that a worker sees, smells, or hears as confidential. That is much too broad. Things I learn and that become part of my general understanding often are not going to be considered confidential. When you see these rote paragraphs saying Everything in the World at Our Company is Confidential, you're already behind the eightball. Is a price list confidential? No. All your sales reps know about it. You're advertising it. Everybody you sell to knows it. The formula you use to arrive at that net pricing might be confidential. Your margins, those would be confidential. How you conduct sales demonstrations? That's not confidential. But it could it be proprietary, if you have some really unique way of demonstrating your product.
RC: How do you define "proprietary"?
DSB: It's proprietary if nobody else is using it and it belongs to you. But many contractors have a tendency to think that everything they are doing is proprietary.
RC: So it must be unique to the business?
DSB: Correct. And if you have material that contains information that you wish to argue is a trade secret, or confidential — let's say a customer list or a rehash list — you need to mark it as Confidential. Right at the bottom. This is the Property of ABC Home Improvement. If you don't mark it, it's not confidential. If I were defending, I would say: Your honor, they're suing me saying this is confidential, but where does it say Confidential?
You took no steps to safeguard this. That's the Achilles heel for a lot of home improvement companies when it comes to trade secrets. You better be able to show that you attempted to protect it. Who doesn't protect something he considers confidential material?
GET IT IN WRITING
RC: What other mistakes do owners typically make in this regard?
DSB: A big one is that they don't have anything — agreements with employees, for instance — in writing. The issue is, if you don't have something in writing, can you go after someone for theft of intellectual property, trade secrets, or data? Yes. But if you don't have an agreement with them in writing you are way behind the eightball in every state. So think long and hard about what needs to be set out in writing, what information in your business you want to claim is confidential and why it is confidential, and what happens if you misuse it. All that should be in those agreements. Your agreements should be an operating guide as to what is going to happen to so-and-so if he goes out and starts using the company's confidential information. That language should spell out exactly what they can't do. And if they do those things anyway, you can go into court and get an injunction to stop them. If you don't have those agreements, you have a bit of a problem.
RC: Of the different types of employee agreements, such as non-competes, non-disclosures, and non-solicitation, should these be in place at all, only for selected employees, or for all employees?
DSB: They're all useful both in the real world and the legal world. Those three are the trifecta, the Holy Trinity of restrictive covenants. They all have different enforceability in different states. But you should have confidentiality (non-disclosure) and non-solicitation agreements with every employee, and you should consider having these with your agents, i.e., independent contractors. These are generally enforceable everywhere if structured correctly. Why would you want to hire someone and not ask him or her to agree not to take confidential information or hire your people away improperly?
RC: Non-compete agreements are the exception, then?
DSB: The non-compete is a horse of a different color. In the last 50 years courts have come to look on them with disfavor. Why can't someone quit and go into business for himself? That's the American Way. OK. But what he should not be able to do is go into business using my information and taking my people with him. So you have different rules for non-competes in different states.
In perhaps 15 states non-competes are virtually illegal. But there are always exceptions. In California if we're business partners, the non-compete is enforceable. If you work for me, though, it's not. That said, is it still worth having as a document? Maybe. A signed non-compete can be used as a really good bluff. On the other hand, it could invalidate your entire employment contract if it gets challenged in court, so you have to be careful how you use the bluff.
RC: Whom should I have the non-compete with?
DSB: Your sales manager. Not the salesman because most don't have the wherewithal to go out and really compete with you. With the salesman, use the confidentiality restriction.
RC: How would a company obtain evidence to show that someone had appropriated intellectual property, i.e., scripts, contracts, databases, price lists?
DSB: The best way to get that evidence is to set up a sting operation. I'm surprised more people don't do that. Essentially, you do a mystery shop. Utilize someone's home. Have them call the new competitor and say I saw your ad, come on out. Then engage the salesperson with targeted questions. See what documents they're using and other materials. If they're actually ripping off your organization, you'll get everything you want. That's the way to do it. Otherwise you'll spend $100,000 in discovery, deposing all their people, subpoenaing them for copies of contracts, sales presentations, scripts, all of it. We had one client who'd been ripped off so badly, their logo and company name was on the back of the contract the new competitor was using.
RC: If I have such evidence, what action should I take?
DSB: That depends on how much money they have, how intractable they are, how difficult they're going to be, and how airtight is the case you have. First, we contact them. Send them a letter saying, look you're doing this, this, and this, and we are coming after you. So stop it immediately. If they don't stop and you pursue it, a warning beforehand that they ignored makes you look good in front of the court.
RC: What steps can I take to prevent someone or anyone from taking scripts, lists, etc., that are my company's property and trade secrets?
DSB: Mark it, maintain it, and manage it. First off, don't try to protect things that have no value to you. Just because you think it's important doesn't make it confidential or a trade secret. So limit what you're trying to protect. Have your policy set up as a separate document. Define the stuff you think is confidential and mark it as such. Copyright it and register your copyright. Don't let that information out. If you're showing it at a sales meeting for instance, make sure it's secure. When a judge sees you taking steps to maintain it, he or she will be impressed.
RC: Do I need to document the fact that I took those steps?
DSB: Correct. A trade secret is a defined term under state law. That means it's something unique to your business, that not many know about it, and that you tried to keep it intact. You also need to be consistent in your efforts to protect your confidential information. I have to show that I have taken steps to keep the information confidential. If I haven't, I lose the ability to make the claim that it is confidential. You can't suddenly decide that such-and-such is a business secret you have to protect if you haven't been protecting it before. I can't sue Joe for not returning the sales kit if I never sued anyone else for leaving the company with their sales kit.
RC: What should the employment contracts say relative to trade secrets?
DSB: Spell out what the parties are agreeing is going to be proprietary. Your customer list. Your pricing formula. If you sue and I am representing, I want to be able to get up in court and say: Your Honor, it's very clear what we agreed to. He agreed right here that it was confidential and important to our business. We have done a mystery shop and here is what we've found him using in the home. Make those agreements clear. Not legalese. I want a judge or jury to say: How could anyone not have understood this? You do that and you've got yourself a strong case.
—D.S. Berenson is the Washington, D.C., managing partner of Berenson LLP, a national law firm specializing in the representation of contractors and the home improvement industry. He may be contacted at 703.759.1055 or email@example.com.
This article is for informational purposes only and should not be construed as legal advice.