Employee mobility in the pharmaceutical industry is a significant concern for employers given the industry’s very significant investment in and reliance upon generating and protecting confidential, proprietary and trade secret information that is used to develop products and create and maintain customer relationships.
Non-competition and customer non-solicitation agreements are one of the primary tools available in most states to protect proprietary information and customer goodwill. Whether non-compete/customer non-solicit provisions are enforceable often turns on whether such provisions seek to protect legitimate employer interests (such as proprietary information and customer goodwill) and are of a reasonable geographic scope and duration.
This blog post is the second in a series about protecting trade secrets and enforcing non-competition agreements in the pharmaceutical industry, and focuses on the role non-competition and customer non-solicitation agreements may play in the industry.
I. Timing is Important
Like any contract, non-compete agreements are potentially effective only if they are operative when needed. The three most frequent employment events that employers should keep in mind when using non-compete agreements are (1) employee onboarding; (2) significant changes in job duties for existing employees; and (3) when exiting an employee that has been terminated or has resigned. Although these timing considerations are important regardless of industry, they are particularly applicable in the pharmaceutical industry because of the intellectual property-intensive nature of the industry and significant numbers of personnel devoted to the research and development function. R&D personnel sometimes are overlooked as a population to which non-competes should apply given their often “inward facing” responsibilities when compared to their executive, business development, marketing, and sales counterparts within the organization.
Onboarding is critical for two reasons: (1) It is the best time to ensure that a new employee will be subject to a non-compete and doing so at the inception of employment often dispenses with any arguments as to whether or not the non-compete is supported by sufficient “consideration,” as the vast majority of states that allow non-competes find that non-competes entered into at the inception of employment are supported by adequate consideration (the restriction on the employee is made in exchange for employment, compensation, being provided company confidential information etc.); and (2) It is another opportunity to confirm with new employees whether they are subject to an existing non-compete entered into with a prior employer. Ideally, the topic of the potential existence of a non-compete will have come up in and have been addressed in the interview process, but addressing this subject again in the onboarding process is an opportune time to discuss with a new employee any restrictions placed on him/her via a non-compete with a prior employer, particularly if the prior employer is a competitor within the pharmaceutical industry.
Significant changes in job duties, such as a promotion or moving into a significantly different role, are an opportunity to provide the company better protections for employees subject to an existing non-compete that has become outdated due the passage of time and/or change in law. Many, but not all, states that enforce non-compete agreements recognize that “continued employment” is sufficient consideration to support the use of a non-compete agreement. For those states where continued employment is not regarded as sufficient consideration, changes in job duties may present an opportunity to provide additional consideration in the form of a raise, grant of stock options, a bonus etc. that may, depending on one’s particular jurisdiction, enhance the likelihood that a non-compete will be enforceable. In the pharmaceutical industry, job changes such as a move from bench scientist to manager or an executive position are examples of job changes that may afford the company with an opportunity to enhance its non-compete protections and spot and address any potential issues with “consideration” in imposing a new non-compete.
Exiting employees is a critical time to remind employees of their non-compete obligations and for the company to revisit any specific provisions within the non-compete that require awareness or action on the company’s part. A proper exit interview is critical and may reveal that the exiting employee is going to a competitor or that the employee expressly denied going to a competitor only to later be discovered that the denial was disingenuous. Learning at the employee’s exit that she/he is going to a competitor may also trigger “clawback” or “forfeiture” provisions within agreements. Smythe v. Raycom Media, Inc., Case No. 1-13-CV-12 (CEJ) (E.D. Mo., Aug. 15, 2013) (because former employer’s Board was vested with discretion to determine former employee’s eligibility under the stock plans, the Board’s decision to effect forfeiture of stock unredeemed by former employee cannot be overturned unless the Board acted fraudulently or in bad faith); see also Lenel Systems Int’l., Inc. v. Smith, 106 A.D. 3d 1536, 966 N.Y.S.2d 618 (N.Y. App. Div. 2013) (where employee voluntarily terminates employment and joins competitor, company’s decision to effect forfeiture of employee’s unexercised stock options enforceable because employee had choice between compliance with non-compete or retention of stock options). The intellectual property-intensive nature of, and prevalent use of stock options/grants within the pharmaceutical industry make adoption of employee non-compete exiting best practices essential. This also counsels in favor of careful drafting of forfeiture or clawback provisions within non-compete agreements as the law as to these provisions can vary significantly from state to state.
II. One Size Fits All Agreements May Make For Easier Agreement Administration, But Beware of Outliers
Employers, particularly large employers, often gain efficiencies in administering uniform non-compete/non-solicitation agreements across employee types. But like other technology-based industries, the pharmaceutical industry should take care to evaluate whether a one size fits all agreement is appropriate in light of (1) the often very diverse make-up of pharmaceutical company employee types (e.g., sales, executive, research and development), and (2) the core elements that nearly all jurisdictions consider when determining the validity of such agreements: (a) geographic scope, (b) duration, and (c) whether the restriction is reasonable (protects a legitimate business interest, such as protecting confidential information and/or company goodwill).
A non-compete agreement with a geographic scope tied to those areas where a pharmaceutical sales representative has actually called upon or served customers may be perfectly appropriate, whereas the same type of restriction would be insufficient to protect the company’s interest when applied to a senior executive or scientist within the company R&D group. For example, if the employee subject to the restriction has been working to develop the company’s next potential blockbuster drug and/or is a senior business development executive, a relatively broad geographic scope may be called for and tolerated, depending on the state in which one seeks to enforce the agreement. See, e.g., Estee Lauder Companies Inc. v. Batra, 430 F. Supp. 2d 158, 180-81 (S.D.N.Y. 2006) (upholding worldwide non-compete where scope of business and former employee’s responsibilities were international and included exposure to and use of trade secrets). Although worldwide non-competes are rare and difficult to justify, the nature of the proprietary information at issue and scope of the duties of the person subject to restriction are important considerations when drafting restrictive covenants.
The takeaway is that pharmaceutical companies should be purposeful in their use and tailoring of non-compete agreements to help ensure that those within their organizations who present the greatest risk in terms of capitalizing on company proprietary information and goodwill are subject to appropriate non-compete agreements, where permitted under applicable law.
III. Enforcement Best Practices–Planning and Pursuit
There are several things that employers within the pharmaceutical industry can do to enhance the likelihood that their efforts to enforce non-compete agreements are successful. Planning on the front end through use of reasonable agreements and then taking appropriate action when a potential breach is detected will go a long way toward protecting company interests. Specifically:
- Use agreements that are up to date and contain appropriate restrictions based on the law of the jurisdiction in which you contemplate potentially enforcing the agreement;
- Recent case law has potentially enhanced the enforceability of forum selection clauses. See, e.g., Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, 134 S. Ct. 568 (2013). Consider designating the jurisdiction and law most favorable to enforcement of your agreements;
- Set up communication channels so that the appropriate personnel are aware of when high-risk employees are leaving (e.g., R&D talks to HR, HR talks to Legal, Legal talks to IT)
- Conduct thorough exit interviews, including ascertaining whether the former employee may be joining a competitor and in what capacity;
- Determine risk level based on employee type, job duties, and exposure to proprietary information. Log items that should be and were/were not returned (e.g., electronic devices, inventor’s notebooks, etc.);
- Where former employee refuses exit interview or is otherwise evasive, consider running forensics on electronic devices to potentially ascertain if former employee is going to a competitor and whether she or he has taken any company data on the way out the door; and
- Create a record of your diligence: exit interview checklists and certifications; reminder of obligations letter(s); and cease and desist letters (former employee and, as appropriate, new employer). However, balance “making a record” with tipping your hand and allowing the employee to get the jump on litigation by filing first in a non-desirable jurisdiction.