Meaningful Nondisclosure and Noncompetition Agreements
As OPSEC professionals we are only too aware that the level of our security is exactly as low as our weakest link. This becomes painfully obvious when our suppliers and contractors hire missing links or any other transitional life forms who’s one and only significant accomplishment is to leak or publish our once secure information across the planet
OK – a bit harsh, but accurate and I think funny.
Some of how companies like to deal with the problem of information leakage is through employment agreements. Employment agreements that have certain non-standard forms of non-disclosure and non-circumvention are the typically way in which much business – not familiar with OPSEC deal with disclosure. I have heard it a hundred time – “they can’t do that – its in the agreement!”
The problem with many of these agreements, while they look wonderful and draconian in their flesh rendering paragraphs, they are useless as it is my experience that they will not be enforced by a court of law. Judges view these agreements as too onerous as most of these prohibitions of actions and duties required by the former employee are not specifically compensated for – thus the judges rules the agreements as unenforceable.
So how do we as employers draft good agreement and contract administrators can coach the supplies to have good agreements?
Well – here are a few ideas that seem to have some traction.
Foundations for a Nondisclosure and Noncompetition Agreement requires a few basics to be addresses first. These basics are:
A) Clearly identify all of your Intellectual Property and Critical Information – IPCI, and not in vague terms but very specific and detailed terms. Yes, I know this can be painful, but if you have an OPSEC program in place you should already have this available to you. Omissions to this list will appear when the persons or committee compiling the list think they have done a good job after one meeting! The reality is this list is a living and breathing document and must be updated regularly. Many people and divisions will have meaningful input and should be sought out for their input.
B) The Nondisclosure and Noncompetition Agreement should be an addendum to a good employment agreement that has all of the terms of the Nondisclosure and Noncompetition and that the addendum sets forth very specific compensation for the employee’s action and non-actions
C) Each state has different labor laws and good trial tested labor lawyer should look over the agreement and see if they are comfortable taking the agreement before a judge.
Now, here is some sample language to consider as well as my comments on the choice of language and how to fiddle with the document but keep the context intact.
Nondisclosure and Noncompetition Agreement
This agreement is an appendix to ______________ agreement dated 01/01/2012 and come into effect immediately – and thus, both parties are urged to take due time and consideration before entering this agreement.
The parties to this agreement are The Hot Manufacturer (THM) and __________________. (SMITH) Both parties are entering into this agreement, freely, willingly and without any duress whatsoever and agree to be bound by the terms of this agreement both from within the US and outside the US.
One of the arguments made is that employees sign these agreement under duress or that everything was happening so quick they did not understand what they were signing, especially when they have violated the agreement and are tap dancing in front of a judge. The extra territoriality of this agreement, however it is engineered, must be phrased to address disclosure and breaches of this agreement that may not be in the US! The location of a violation often has a great deal to do with the defendant’s selection of venue… You, as the employer must control venue (the location of the courts of competent jurisdiction under which you may wish to have any dispute heard).
THM has certain intangible assets that belong to the company and no other company. The value of these assets depends on the exclusivity of the use of the intangible assets by THM and only THM. These assets are defined as Intellectual Property and Critical Information or IPCI. Intellectual Property are patents, trade marks, copyrights and trade secrets that are a key part of THM being an effective competitor in the niche of Hot Manufacturing. Critical Information is that information that THM must keep private and specifically out of the hands of any competitor to THM. The IPCI is clearly delineated as follows
The Trade Mark – The Hot Manufacturer. THM Goods, THM Wheels, etc.
Copyrights – All advertising, all manuals on our products, all technical data internal to the company whether marked or not, all research logs, laboratory note books, software programs – even patches and scripts, marketing plans, employee directory.
Patents – Patent numbers 7,876,678 and application number 456,987,432, etc..
Trade Secrets – Formulation for all injection molding, de-binding and de-sintering materials, all research on all products and markets, marketing plans, etc.. Don’t stop with the core for often the periphery skills an technology make what one does more economical – call it tradecraft unless you have a netter term.
Names of our customers, travel plans of the executives of the company, printers used by the Company, all pricing Information for an and all sales, commercial relationships with all suppliers, franchisees and licensees.
Intellectual Property will have a specific date of creation where critical information seems to ebb and flow. This loose definition is better set fort in my small diatribe about IPCI and OPSEC in the white paper “Treasury’s Role as the Custodian of Value for Intellectual Property and Critical Information, the Impact of OPSEC on Valuation – page 2 ( http://www.feeinc.com/wp-content/uploads/2012/03/Treasury-and-IPCI.pdf )
(a) At all times while this agreement is in force and after its expiration or termination, SMITH agrees to refrain from disclosing THM’s IPCI to anyone outside the company. SMITH agrees to take effective security measures to prevent accidental disclosure or theft (industrial espionage) of THM’s IPCI. THM will assist SMITH in these efforts.
The key here is not to let SMITH try and figure it out, I know you will train SMITH in what to do and not to do, but SMITH must also know that they can come ask questions and seek help. This help should be offered open and in a genuinely supportive fashion.
(b) While this agreement is in force, SMITH will use their best efforts to discharge SMITH’S duties to THM and to abide by the nondisclosure and noncompetition terms of this agreement.
THM agrees to compensate SMITH as follows.
a) X dollars for the following duties _____ consulting, selling ?????______
This is a chance for the reiteration of the employment terms…
b) X dollars to keep the IPCI of THM private and secure within the operations of THM forevermore. This compensation will pay paided 90 days in arrears and will be due even in the event of termination for cause, unless that cause is specifically a violation of this Nondisclosure and Noncompetition Agreement
Here THM is very specifically paying SMITH for the services, duties and obligations under this agreement – it is not bundled as part of a second agreement.
c) X dollars not to work for any direct competitor of THM and THM’s operations for a period of 120 days past termination. This compensation will be paid 90 in arrears and will be due even in the event of termination for cause, unless that cause is specifically a violation of this Nondisclosure and Noncompetition Agreement. The direct competitors to THM are specifically named as:
• Any Manufacturer, existing or future offering similar or identical services to THM, those services being _________________ ,
• Nick’s Big Metals,
• Naomi’s Wheels and Things,
• Mohammad Yang’s Racing Supplies,
or any other direct competitors as they become known to us during the term of this agreement.
The point is to be specific as to what you do not what they to do. All manufactures of metal products – is too general and will be struck down by the courts. Lifetime or 5 years prohibitions are too onerous and will be struck down by the courts. So what you are doing is being very specific to where the knowledge of a former employee cannot be used – not just an industry – but take the time to name industry specific competitors – no matter where in the world they maybe located. A person must be allowed to make a living in their trade – so allow them the opportunity to make that living – just not with specific competitors. Make the term of any non-compete long enough for the position, but not the trade. A VP of manufacturing may get a longer prohibition than a machinist. Why? You want to make the prohibition period long enough so they cannot out wait you completely and will need to find work in a related, but not competing field or company.
d) Nothing in this Nondisclosure and Noncompetition Agreement is to assert that SMITH once leaving their engagement with THM cannot seek employment in any field they wish, even other manufacturers. This Nondisclosure and Noncompetition Agreement does not prevent this, it only intends to prevent SMITH working for a competitor and only a direct competitor at that. Further, if the employee has a question as to eligibility in working with another company they can ask THM and THM will respond within 2 working days.
Again – reinforcing the ability to work and for the company to resolve any conflict or questions immediately, if not sooner. It is both about being compliant with the laws but being seen as, and acting as, an authentic employer who does not wish the former employee any malice. On the contrary you wish them the best of luck and will help resolve issues before it comes to litigation – and all you ask of them is that you can keep your IPCI – your IPCI.
e) SMITH agrees to pay liquidated damages in the amount of $ 1,000 per day SMITH works for or consults with competitor as well as $10,000 for each and every disclosure of the named items of IPCI – even if the violating disclosure is to a person or entity not seen as a competitor to THM.
This is the agreed punishment for disclosing IPCI and or working for a competitor. The punishment has to be meaningful and real. Meaningful in that it is a significant sum of money to them, not necessarily to you, and well as a financial number that can could reasonable be seen as able to pay. A fine of $100 per day may be too much for some people and a fine of $1,000,000 for some is insignificant. The liquidated damages contracted to has to be meaningful to the person. Too low they do not care, to high – they will just file for bankruptcy and tell you to send a proof of claim for the to bankruptcy court.
This last part is also why you pay the loyalty pay in arrears so that you have something you can take from them immediately without having to seek a judgment. The loyalty payments, in arrears, seem to have been very effective in keeping former employees to mind the agreement. How long and how much they should be is a determination you need to make.
I have also seen companies offer trailing benefits that can be clawed back, restrictions on IRA and 401 (k) roller over, retirement plan matching percentage clawed back, or withholding or all employment records as means to let the employee know the company is serious of keeping is IPCI private.
Think about it – your former employee is gone and you have no contact with them – how do you have any influence on their lives – any at all? You don’t, that’s is why a trail of income is important to keep former employees aware of your presents and the agreement.
As THM has offices and interests in many states and countries THM can enforce the terms of this agreement in any domestic or international jurisdiction it so chooses. SMITH may enforce the terms of this agreement only in the County of ______ and State of ________.
This has been an edgy provision, and has worked in some commercial litigation in which I have been involved. Ideally if the jurisdiction is the US and the IPCI was stolen and is in Hong Kong – you want to take action as quickly as possible and embroil the possessor of the ill-gotten IPCI where you actions can have the greatest effect. Suing in the US getting a judgment and domesticating the judgment overseas is very time consuming and expensive. The owner of the IPCI needs to have more immediate remedies available to them. This, is just one way – there are others.
SMITH acknowledges that THM is serious about the protection of the IPCI, that THM is specifically paying SMITH to keep the IPCI from ever being disclosed and that THM is specifically paying SMITH for these efforts. THM is serious in not wishing SMITH to go to work for any of the named competitors above for a period of only 120 days and that SMITH is only restricted for a narrow period of time, yet is free to work with any other companies. Further that THM is paying SMITH specifically for these duties and restrictions and SMITH accepts this.
My favorite paragraph – saying exactly what you mean!
re acknowledging the restrictions
Other boiler plate that is so important to tying the parties together on validity of the agreement, etc……
Now that is a different form of getting the employees of companies of the suppliers to keep what they know secrete. That is all that is asked. This type of agreement paired with traditional OPSEC is a real value enhancer not only for an OPSEC program but also for the contractor who may now have a more enforceable Non-disclosure Non-compete agreement.
Keeping you information – yours is the key to OPSEC is this is just another example of a tool in the varied and multidisciplinary tools available to us, each and every day.