Non-competes common, but companies wonder if they can be enforced

Many companies have proprietary information they want to protect from

competitors.

But in Boulder County, where new businesses hatch like eggs by employees

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splitting off from larger companies, protecting new ideas and research from employees starting their own businesses or finding new jobs is a real challenge.

Whether the company has three or 300 employees, a non-disclosure agreement, stating that all research and new information at the company is the property of company, is often required. Although few companies have gone to court in Colorado to settle litigation pertaining to stolen company secrets, a number of companies have chosen to settle out of court.

Opinions vary on how effective these non-disclosure agreements are in practice.

Although Owl Technical Associates Inc. in Longmont believes agreements can sometimes be unenforceable, all employees must sign one, said Chris Lovett, vice president and a stockholder.

“We do it as a matter of course,” Lovett said. “Ours states that all information belongs to the company — all information of a business or technical nature belongs to the company. But we believe that basically it is unenforceable legally.”

Lovett said that the company contract also states that an employee cannot go to work for a competitor for at least three years after he or she leaves Owl Technical. But the company has never taken anyone to court for violating the agreement.

“Most companies settle out of court,” Lovett said. “Our market is so tiny that it is hard to find a job in this field. We are just a tiny little slice of the industry. Plus we choose our employees very carefully. We are a small company, so everyone must fit.”

Owl Technical was incorporated in 1973. Employees make computer-controlled test and

measurement instruments, equipment and software for food and beverage processing and photometric equipment. Choosing employees who fit well into the organization and share goals is a big step toward protecting the company’s proprietary information down the road, Lovett added.

Lovett said she thinks if employees were taken to court for working for a competitor a suit could be thrown out of court because it could be conceived that the employee was being denied a means to make a living.

“Where people get into trouble,” Lovett said, ” is in the disk drive and computer industries.

“Disk drive and pharmaceutical companies are the hotbed of controversy. With disk drive manufacturers, one false move and the analysts are disappointed and the stock drops. So they are watching every step a company makes, and if a senior designer jumps ship and goes to

a competitor and the market gets wind of that — you are toast. Everyone is very cautious. They are real vulnerable to any bad news or any litigation.”

As with Owl Technical, most Colorado companies have not tested non-disclosure agreements in court.

But California has had some celebrated cases, said Karl Hawkins, chief financial officer at Electroscope Inc. in Boulder. At the medical instrument/medical device company, all 32 employees sign a non-disclosure contract.

“A lot of the information we deal with would be damaging if it would get into the hands of our competitors,” Hawkins said. “We don’t want employees to bring in information from other companies, and we don’t want anything that is developed here taken to another company. I haven’t been in Colorado long enough to say if these contracts are effective, but I do know of court cases in California where they have been effective. Fortunately we haven’t had to test it here.”

Electroscope does research and development, manufacturing some of its products, such as scissors, medical shields and ancillary devices, at the Boulder facility.

“All of our work is proprietary,´ said Hawkins, “and you can’t take information about how they did things at one company to another company. We all bring information to our jobs and there is a very fine line here, but specific trade information, product applications, customer lists and research are proprietary.”

Many companies expand the non-disclosure agreements to vendors, subcontractors

and even some customers.

All 1,000 employees at Exabyte Corp. in Boulder sign must sign an agreement. So do customers and vendors, said Craig Smith, Exabyte risk manager.

The computer company had the opportunity to test an agreement in court about two years

ago.

“We had an employee that took some patented information from the company and manufactured products,´ said Smith. “It was a patent that we had not used, but it was developed while the employee was at Exabyte.”

While it is typical for employees to have their names on a patent, in contracts, employees typically assign all right to patents over to the companies they work for. This was the case with the Exabyte agreement.

“I feel that these agreements are very effective,´ said Smith.

Although the agreements are widely used, they do not replace a company’s responsibility for hiring quality employees, some say.

“The (agreements) are only as good as the people who sign them,” said Jerry Donahue, executive director of the Boulder Technology Incubator, an agency that helps small, high-tech businesses get started.

“These agreements do not take away the responsibility of companies to hire good employees,” Donahue said. “These agreements can be effective, but the burden of proof is on the person making the claim that their information has been violated. It is a difficult position for many small companies, such as the ones we deal with here, because they need to go out and develop products, and they can’t be hung up with court cases.

“But in legitimate relationships, it can clarify misunderstandings. It is rare for these cases

to even get to the threat of litigation and even more rare to get into court. Most of the time people settle the dispute with arbitration. Usually there is a misunderstanding or years later, after people have left their jobs, they use a patent that has not been used before to make a product. We

always tell people to get a release from the company. It is still valuable intellectual property for a company even if the patent is just sitting on a shelf.”