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How to Protect Your Company Secrets

By Cynthia Hsu, Esq. | Last updated on

Imagine this scenario unfolding: You own a small bakery. You've spent your entire life crafting the perfect cupcake recipe. Due to the formula's success, you've had to hire an apprentice to help you out. For a few years, he's happy to help you create your masterful cupcakes. Since he's helping you bake, you end up giving him the secret formula to your delicious wares.

Everything is great -- until he decides to leave and start his own cupcake shop right across the street from you. Not only that, but he decides to use your cupcake recipe.

Et tu, brute. Do you feel that stab of betrayal? It might have been avoided if he had signed some legal agreements.

Non-disclosure agreements:

Contracts called non-disclosure agreements can be used to help protect your small businesses' confidential information. These agreements prohibit a person from disclosing or using trade secrets without permission. When crafting an agreement, what is considered "confidential information" must be defined.

These contracts can help protect secret formulas and other confidential information. Non-disclosure agreements usually can't include items that were discovered prior to or independent of your confidential information. For example, if the apprentice baker crafted his own cupcake recipe independent of yours and signs the agreement, he can still use his recipe.

Non-compete agreements:

Another way small businesses can protect themselves is to have employees sign non-compete agreements. Typically, these contracts will limit an ex-employees ability to compete in the same market for a limited duration after they leave your employment. There are usually several requirements:

  • The agreement needs to be supported with consideration.
  • The agreement needs to protect a legitimate business interest.
  • The agreement needs to be reasonable in scope, geography and time.

However, some states frown upon non-competition agreements and generally won't enforce them except in limited circumstances.

If your small business is concerned about protecting its company secrets and is considering including non-compete clauses in contracts or having employees sign non-disclosure agreements, contacting an attorney may be helpful. State laws will vary, so it's best to craft an agreement that fully complies with your jurisdiction's requirements.

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