Non Compete Agreements: A lesson from Google

Noncompete Agreements: A Lesson from Google on Inevitable Disclosure
October 2005
Inevitable discovery is a legal theory, which may cause technology companies and professionals to reexamine noncompete agreements and provisions in employment contracts. In July 2005, Microsoft filed a lawsuit in Washington state court against Google and Microsoft’s former corporate vice president of its Natural Interactive Services Division, Kai-Fu Lee. The lawsuit is based largely on a noncompete agreement Lee signed with Microsoft and was brought after Google hired Lee to head its research and development facility in China. In addition, Microsoft argued that certain trade secrets would inevitably be disclosed through Google’s employment of Lee.

The concept of inevitable disclosure stems from the threatened misappropriation of trade secrets. Under the doctrine of inevitable disclosure, it is argued that disclosure of trade secrets will likely occur based upon the employee performing similar job functions with his or her new employer. State and federal courts are split as to whether the mere threat of misappropriation of trade secrets is enough to bar an employee from similar employment based on the doctrine of inevitable disclosure. For this reason Microsoft wants the case decided in the state of Washington, where the law supports the doctrine of inevitable disclosure and where a judge has issued a temporary ban that will keep Lee from performing certain work for Google. Google has counterclaimed in the State of California where the courts are less likely to enjoin employment.

To be a protectable interest under Michigan common law the confidential information does not need to rise to the level of being a trade secret, however the mere threat of misappropriation may not compromise the right of employees to change jobs. To enjoin employment, a company must demonstrate that the employee has more than general knowledge of the company’s trade secrets and that employment by the competitor will inevitably lead the employee to rely on the trade secrets. Unless those facts are clearly demonstrated courts are not quick to enjoin employment. Michigan companies are also protected from the misappropriation of trade secrets under the Uniform Trade Secrets Act (UTSA), MCL 445.1901 et seq., which meet the following definition: trade secret means information, including a formula, pattern, compilation, program, device, method, technique, or process that is both of the following: (i) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use. (ii) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Even with protection of the UTSA, Michigan companies are better served by utilizing noncompete provisions in the employee’s employment agreement. In Michigan, the Legislature has given companies the express authority to protect themselves against threatened misappropriation of confidential or trade secret information under statute.

Restrictive Covenants in Michigan: Until it was repealed in 1985, Michigan’s antitrust statute MCL 445.761 made any agreement or contract to limit or prevent employment or trade to be against public policy and void on its face. However, in 1987, the Michigan Legislature enacted the use of restrictive covenants in employment agreements under the Michigan Antitrust Reform Act (MARA), MCL 445.771 et seq., which enables the employer to obtain an agreement or covenant from an employee to protect the “employer’s reasonable competitive business interests.” MCL 445.774a. An employee’s post employment competition may be prevented under MARA, as long as the agreement is reasonable in duration, geographical scope, and the type of activity restrained.

Business Interests: Michigan courts have specifically acknowledged that where an employee has an intimate knowledge of a client’s personal finances and business practices, the employer has a reasonable business interest to protect through a covenant or agreement not to provide work for the employer’s former clients. Employers may also use restrictive covenants to protect their investment in highly specialized training provided to an employee. Noncompetition agreements may not restrict an employee’s future employment where the business interest being protected is the general knowledge and skills the employee gained through his or her employment. If protecting confidential information is the basis for a noncompete agreement, the employee must have information that is in fact confidential. To meet this standard employers may have the employee stipulate to specific criteria in his or her employment agreement as to what constitutes confidential information.

Duration: The duration of restrictions are generally tied to the period of time that is necessary for the information that protects a legitimate business interest to become public or nonsensitive. Any duration over one year may be susceptible to scrutiny by a court, however noncompete restrictions under employment agreements have been deemed reasonable from six months to three years. After sale of a business, two to ten years may be held to be a reasonable duration for noncompete restrictions on executives that were involved with the former business, depending on the business interest protected.

Geographic Area: A reasonable geographic restriction depends on the nature and scope of the employer’s business and the nature of the employee’s duties and responsibilities. Courts have found that where companies have a global presence in the market place a worldwide restriction is reasonable. Sales personnel whom have built rapport with clients can easily take customer contacts and insert that business with a new employer. Depending on specific facts, doctors, lawyers, dentists and similar professional employees may be limited to a lessor geographical restriction since clients and patients are less willing to travel for routine services.

Damage Provisions: The Michigan Supreme Court has affirmed that employers have an interest that may be protected in information about its clients that an employee gains by virtue of his employment. That court has stated the remedy for breach of an agreement protecting this interest is money damages. In addition to the provisions limiting or restricting employment and that injunctive relief is appropriate, the employment agreement may also have a damage provision which calculates damages to be paid to the former employer if it breaches his or her duties under the agreement. This provision should also state that it is an option that the former employer, at its sole discretion, may elect to seek the money damages instead of, or in addition to, enforcing an injunction against the former employee. Michigan courts favor provisions that obligate the former employee to pay an agreed to damage settlement amount rather than restricting the employee’s opportunity for gainful employment.

Conclusion: Although certain information may be protected under Michigan common law or the UTSA, the best practice is to utilize reasonable restrictive covenants in employment agreements to protect legitimate business interests under MARA. One lesson to learn from the Microsoft and Google lawsuit is that the choice of law is important to settle any employment dispute since law from state to state varies on whether or not a restrictive covenant not to compete is enforceable. In addition to the noncompetition provisions the employment agreement should also provide that the agreement would be governed under Michigan law so that the contract provisions are interpreted to protect the company’s legitimate business interests under the UTSA and MARA.

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