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What about previous company non-competes?

Entrepreneurs tend to remain in the business arena they came from.  Some are alumni from companies that would be a competitor to the enterprise being created or joined.  And some are former selling shareholders of just those businesses.  What is the rule about those pesky non-compete agreements signed upon discharge or sale of the previous company?

The good news is that if you were not a significant (usually 5% or more) selling shareholder of a previous company, many states specifically exempt non-compete agreements signed between companies and their employees or minority shareholders.  In that case, you must worry only about information and trade secrets taken from the previous company which are both certainly subject to protection by almost all laws and courts.

So, to everyone: do not take customer lists, design documents or any document considered a trade secret from any previous employer or previous consulting customer.  Yes, some companies were sloppy and did not have you sign a confidentiality agreement, but that procedural slip does not protect you from their legal wrath.  Further, there is no expiration on these documents. You cannot complain that the document or information in question is more than five years or two employers old.

  • Kent Deines

    There is another defense about trade secrets that we used: Just show us one. The former employer, when challenged was unwilling or unable to present one. We were pretty confident that would be the case because we couldn’t identify a secret to steal if we wanted to. We actually attempted to identify secrets before we quit but couldn’t identify any.

    The problem is that to have a trade secret, you must first have a secret. To have a secret, you have to make some effort to keep it a secret and not just leave it laying around in plain sight for any fool, including us (me), to see. These folks made no efforts to do anything to limit access or identify their secrets.

    I actually think this is very common. I have only worked at a few places, so my sample is small, but I couldn’t tell you a secret from any of them if I wanted to.

  • Brad Engstrand

    Thank you for some clarification on non-competes and NDAs.

    I went to your seminar about 18 months ago in Milwaukee and have learned not just some pointers but some attitude from reading your emails. They are informative, and thank you.

    I have a small company with some startling technology which I am bringing to industry. Some very large players are courting me and I am a stickler about NDAs etc. I find it the first hurdle, and some of these big boys complain, and want it all their way. I have politely refused to always see things their way, and have won more than one contest. I find it a great barometer about what to expect for the rest of the journey with them.

    One thing I would like to see you briefly mention are the handful of trade secret laws some States have and others do not. I do business in Wisconsin, and we do have a trade secret law. I find this an interesting wrinkle in the legal gray area of IP. It might be interesting to cover that in a future posting.

  • Mike Gray

    Dave: A few thoughts that may add to your article. A lawyer associate of mine has often told me that for employees, the following three things are enforceable in a non-compete agreement in California.

    * The taking of materials (lists, emails, equipment, etc)
    * Recruitment of other employees still working at the old company
    * Disparaging remarks (written or oral) regaridng the old company although the company can disparage you

    He says after that just about everything is open and un-enforceable. Certain industries can offer a payment to contractually prevent someone from working for a competitor (a friend of mine was offered 350k from Smith Barney not to work for rival financial firms for 3 years).

    Just some thoughts that might help, keep up the good work

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