By Los Angeles Business Lawyer Robert G. Klein, Esq.
You are a highly skilled individual with a strong technical background and land a job as the Chief Technology Officer for a large Company in a specialized industry. The Company offers a great benefit package detailed in the company’s employee manual. After several years of hard work your Company is taken over, either by merger or acquisition, and the New Company terminates your position.
Upon your departure, new management may ask you to sign a Separation Agreement as a condition to receiving your severance package. In this Separation Agreement, new management asks you to release any and all claims, whether known or unknown, you may have against your former employer and the new acquiring company.
The Separation Agreement may also require you to acknowledge that you were in possession of the Company’s trade secrets and confidential information and that you agree not to use these trade secrets in competition with your former employer or with the Company’s competitors.
Other clauses in the Separation Agreement preclude your from soliciting customers of your former employer, preclude you from soliciting other employees of your former employer, and to inform all prospective new employers that you are bound by this Separation Agreement. This latter provision is designed to put your new employer on notice that they may have liability if they hire you and benefit of the former employer’s trade secrets.
Mistake 1. Before you sign this Separation Agreement make sure you do not have any claims for compensation against your former employer or the acquiring company. Carefully look at the severance package and determine what, if anything, you would be entitled to if you do not sign the Separation Agreement. Ask yourself if they are offering you compensation they were not obligated to offer in return for your signing the Separation Agreement.
Mistake 2. Do not sign any document where you agree the trade secrets referenced in the Separation Agreement is in fact a trade secret. A trade secret is information that derives independent economic value from not being generally known to or discernable by the general public or to persons skilled in the trade.
This definition is not always easy to apply. For example in a case called Whyte v. Schlage Lock Co. the trade secret consisted of specific casting technology, flow technology, manufacturing technologies and Schlage’s electroplating and plating bath chemistries and methods. The court held that such technical “know-how” is the quintessential trade secret.
However, in the case of Cinebase Software, Inc. v. Media Guar. Trust, Inc., Cinebase claimed that it possessed trade secrets in its software design and specifications, in the technical know-how of its engineers, and in various marketing materials and strategies. The court held the designation of the software engineers’ “technical know-how” regarding what does and does not work in the process of designing digital media management software was simply too nebulous a category of information to qualify for trade secret protection.
If you sign something agreeing or acknowledging certain information qualifies as a trade secret when it is not a trade secret under the law, and you are later involved in litigation over this issue, you may be precluded from taking a different or inconsistent position.
Mistake 3. Do not agree to inform prospective employers or allow the former employer to contact your new employer if you are not in possession of trade secrets. If you are in a highly specialized industry this clause will prevent you from seeking gainful employment. This would violate California Business and Professions Code Section 16600 which renders every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.
Your former employer can stop you from engaging in a lawful employment if you are in fact using trade secrets belonging to your former employer. Absent a true and valid trade secret your former employer cannot bind you to a contract where you agree not to solicit customers that are not trade secrets or use any know-how you gained while employed if that know-how also does not qualify as a trade secret.