Do Not Underestimate the Power of a Restrictive Covenant!

Author: Melissa A. Silver, XpertHR Legal Editor

A federal district court's ruling in Indiana reinforces the effectiveness of restrictive covenants to protect an employer's competitive edge in its industry. As shown in Lincoln Chemical Corp. v. Dubois Chemicals & Galaxy Associates, Inc., Docket No. 3:12-CV-303 RLM-CAN (S.D. Ind. December 13, 2012) restrictive covenants can work to an employer's advantage.

In Lincoln, sales representative Edward Dole (Dole) entered into an employment agreement with Fremont Industries that contained a confidentiality provision requiring Dole to return all confidential information to his employer when his employment ended. The agreement also contained a provision that it is governed by Minnesota law.

Fremont Industries was later acquired by Fremont Acquisitions, which later merged with Galaxy Associates (Galaxy). When Fremont Industries was acquired by Fremont Acquisition, Dole signed an acknowledgement that the employment agreement would apply to his employment with Fremont Acquisitions. The terms of the employment agreement then transferred to Galaxy because Minnesota allows such employment agreements to transfer to a successor in interest.

Dole kept a large amount of Galaxy's proprietary information on his personal computer, including: sales, margins and accounts receivables; a list of prospects, including potential sales opportunities; pricing analysis; a customer pricing list for Dole's accounts; and a summary of all sales employees' commission rates from January through October 2011. When Dole resigned from Galaxy to work for its competitor, Lincoln Chemicals (Lincoln), he used this confidential material to sell to his former Galaxy customers.

Galaxy filed a motion against Dole and his current employer Lincoln for a preliminary injunction to stop Dole from among other things, misappropriating Galaxy's trade secrets. In support of its motion, Galaxy presented testimony that most of the information retained by Dole was "neither generally known nor readily ascertainable and derived economic value from secrecy."

Dole did not dispute that he retained Galaxy's proprietary information and instead argued that he retained the documents because Galaxy never asked for their return or destruction.

The district court granted Galaxy's motion and held that Dole "had a contractual obligation to turn over all confidential information (including trade secrets) to his employer when his employment ended" and did not do so. Therefore, the court ruled that Galaxy had shown a strong likelihood of success on the merits of its trade secrets claim.

This decision serves as a reminder to employers to protect their competitive edge in their industry by preventing employees from working for a competitor, poaching the employer's clients or customers and/or disclosing their confidential information. To protect these valuable interests, employers should require all employees with access to confidential and proprietary information to execute a nondisclosure, noncompete and/or nonsolicitation agreement.

Although restricting the use of this information by employees during and after their term of employment may be vital to the protection of an employer's business, an employer must ensure that the terms of the agreement protect the employer's legitimate business interests and extends no further than is reasonably necessary to protect those interests. Employers should be aware, however, that some states do not enforce noncompete agreements, such as California and North Dakota while others place restrictions on the types of information that are considered confidential and on the agreement's geographic scope and duration.