August 2007

August 2007

COVENANTS NOT TO COMPETE AND TRADE SECRET AGREEMENTS B
SAME OR DIFFERENT?

While Colorado=s courts have found a Colorado statute that voids many types of non-competition agreements establishes a legislative policy against enforcement of non-competition agreements in Colorado, because Colorado has adopted the Uniform Trade Secrets Act, Colorado=s courts have said it shows a legislative policy favoring enforcement of trade secret agreements. How do the two agreements differ?

Obviously, a non-competition agreement says one person cannot compete with another. These agreements are often obtained from employees. When they are sought to be enforced in Colorado, the burden is on the employer to demonstrate an agreement does not violate Colorado=s statutes. Often the pivotal point in potential competition that is sought to be prevented by a non-competition agreement is confidential information of an employer a former employee may carry with him or her into a new enterprise.

The definition of Atrade secret@ under the Uniform Trade Secrets Act is very similar to what most people think of as confidential information generally:

[T]he whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.

To be a trade secret the owner must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access to the secret for limited purposes.

AConfidential information@ may be broader than Atrade secrets@ but for most practical purposes they are generally equivalent. Too often the owners or management of a business will seek to take the position that Aeverything@ about the business is a trade secret or constitutes confidential information. This position does not accomplish any positive result. In fact it undermines enforceability of non-competition agreements and trade secret protection agreements. Frequently when all of the information owners or managers of a business want to include within a definition of Aconfidential information@ or Atrade secrets@ is examined carefully, it is concluded there is very little that rightfully falls under the definition of either term. This is because much of the information about a business is generally known outside the particular business. That type of information has never been considered by the courts to be confidential or a trade secret.

If one wants to create a non-competition agreement or a trade secret agreement, it is necessary that the definition of information that is Aconfidential@ or that constitutes a Atrade secret@ be carefully and specifically identified. Sweeping terms, such as Aall financial information,@ will not be satisfactory. At the same time, although all names in a customers list may be found in the phone book, customer lists compiled by a company may seem general but may actually be a trade secret if proper steps are taken to protect the list and the identity of the persons on it.

Because of the position of the Colorado courts, a company may find it productive to seek to prohibit use of trade secrets away from the company (especially those that would foster competition if carried to another party). Often a properly drafted trade secret agreement may accomplish as much as a non-competition especially if Colorado law is applied.

This Newsletter is provided for information purposes only. Accordingly, the information is general in nature and is not intended to address a specific issue or problem. The reader should seek legal counsel of his or her choice for specific problems. The receipt of this Newsletter does not create an attorney-client relationship with the author or the law firm of Dean, Dunn & Phillips LLC.