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  • Writer's pictureDenny Esford

Are You Protecting Your Trade Secrets with a Restrictive Covenant?

You Better Have Separate and Reasonable Compensation If You Want an Illinois Court to Enforce It Against Newer Employees.

The Illinois First District Appellate Court’s opinion in Fifield v. Premier, 2013 IL App (1st) 120327, handed down last year serves as a latest reminder to all Illinois employers that if you want your Illinois employees to be prohibited from disclosing trade secrets if they resign and go to a competitor, then it is a very wise investment to specifically compensate them for that restriction. If you don’t, the restrictive covenant the employee signed at the beginning of employment may not be worth the paper it is written on.

In Fifield, the employee left for a competitor in violation of a restrictive covenant after just seven months. While the case only dealt with an employee leaving for a competitor, not the misappropriation of trade secrets, a restrictive covenant is nonetheless a commonly used tool in an employer’s efforts to keep trade secrets from finding their way to a rival. Here, we address Fifield in the context of protecting trade secrets.

The legal analysis in Fifield began by reiterating the general rule in Illinois that to be enforceable, restrictive covenants require adequate consideration, i.e., compensation. While “adequate” can vary based on specific circumstances, Fifield went on to follow a line of prior Illinois decisions that set the minimum compensatory floor for adequate compensation. Namely, that if the sole compensation for the restrictive covenant is simply employment, said employment must extend for a minimum of two years in order to enforce a restrictive covenant.

So does Fifield mean your cost of doing business just took a major hit to protect your company’s trade secrets? Not necessarily. Here are some immediate common sense steps you can take to reduce both risk and cost.

Identify your trade secrets. What exactly are you trying to protect from a competitor? In general, a mere customer list is generally not protectable as a trade secret, whereas a history of your costs and profit margins kept in your database by individual customer generally is protectable as a trade secret.

Restrict Access. First, determine who has access to each trade secret and why. Once each trade secret is specifically identified, determine which employees need to know only those trade secret(s) necessary to perform their respective duties. If everyone from the sales person to the secretary has access to the complete customer file, then a blanket restrictive covenant signed by all employees is including persons that do not need to be compensated.

Don’t compensate everyone the same. Instead, compensate for the restrictive covenant based on your estimated value of the trade secret(s) to be protected. For example, there is usually no need for a ten-person sales force to have access to sales records for customers an individual sales person does not call upon. So the restrictive covenant compensation to each salesperson can be lower than, for example, the Vice-President of Sales or Controller, who will both need more access to customer records than an individual sales person.

Compensate creatively. Compensation simply means economic value, not just salary or cash bonuses. Consider a monthly health or business club membership for the sales people, and stock options or a golf club membership for the Vice-President of Sales and Controller. Strive for the compensation to reflect the relative value of the trade secret(s) click here now.

All company circumstances are different and these suggestions are no substitute for specific legal advice applicable to your company’s situation. Ideally, you should have your company undergo a thorough trade secrets audit from an attorney experienced in trade secrets law and/or litigation, much the way insurance carriers provide advice and discounts based upon reducing risk at your facilities.

In the meantime, these common sense steps, while not a business or legal guarantee, will go a long way toward reducing the risk of losing trade secrets to a competitor and keeping your costs of doing so under control.

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