Violation of a Non-Compete Agreement or Misappropriation of Trade Secrets?
It is important for a business to know how trade secrets laws may be used like a non-compete agreement to prevent former employees from using confidential information.
A non-compete agreement restricts a former employee from working for a competitor. These agreements are construed strictly by courts because North Carolina public policy disfavors them. After all, they are restraints on commerce, rather than encouragement of it.
On the other hand, protection of corporate trade secrets is treated with somewhat more respect by North Carolina courts. The definition of “trade secret” under G.S. § 66-152 is broad, encompassing business or technical information, including formulas, patterns, programs, information, methods, techniques, or processes.
But what if you could disguise a non-compete as a trade secret, thereby getting a trade secret that was, ostensibly, accorded additional deference? From the standpoint of protecting corporate interests, it would be a panacea. On the other hand, from the employee standpoint, it may be anathema.
A recent article in North Carolina Lawyers Weekly notes a trend in business attorneys abandoning filing of lawsuits for violation of non-compete agreements, and instead filing claims against departed employees for breach of trade secrets.
Most employees who sign a non-compete also sign a non-disclosure agreement promising not to disclose the employer’s business practices, data, or other confidential information. When these employees leave, their non-compete agreements may be difficult to enforce (given judicial trends), but not so with regard to trade secrets.
When the employee goes to a new employer, they often cannot help but use, or at least appear to use, the information they gained about their former employers. The line between a non-compete and trade secrets is blurry, so (the theory goes) why not use the type of claim most likely to secure a positive ruling for the employer?
The Superior Court decision in Glover Construction Company v. Sequoia is instructive. The departing employee (who happened to be the grandson of the owner of the employer) created a competing company. He was alleged to have “misappropriated trade secrets, solicited key employees, and interfered with customer relationships.” Notably, he was not sued for violating a noncompete. Rather, he was sued for violating the trade secrets law.
Under the North Carolina Trade Secrets Protection Act, “misappropriation” is defined as the “acquisition, disclosure, or use of a trade secret of another without express or implied authority or consent, unless such trade secret was arrived at by independent development, reverse engineering, or was obtained from another person with a right to disclose the trade secret.” G.S. § 66-152(1).
Regardless of the fact that there was no agreement requiring employees to sign confidentiality or non-compete agreements, the court held that the Trade Secrets Protection Act may have been violated. Further, the departing employee may also have committed unfair and deceptive acts or practices, as well as breach of fiduciary duty.
The case has not been finally decided, but it represents the intersection of the principles of non-competes and trade secrets. It is certain to be a case that employment attorneys and corporate attorneys refer to going forward.
Employers with employees who recently left, and employees who are thinking about leaving, would be wise to be careful that they heed both the non-compete provisions and the Trade Secrets Act. The attorneys for both sides will certainly be paying close attention.
Dye Culik PC is a Charlotte, North Carolina business law firm representing businesses, entrepreneurs, and franchisees in all stages of the business lifecycle. From formation to acquisition, and from mergers to litigation, contact us to see how we can help your business succeed.