Jan 3, 2013 – SC Supreme Court Upholds Confidentiality Clauses in Employment Agreement
January 2, 2013
Nexsen Pruet, LLC
Jan 3, 2013
In its most significant employment law decision of 2012, Milliken & Co. v. Morin, the South Carolina Supreme Court addressed the enforceability ofprovisions in an employment agreement designed to protect the employer’s intellectual property from unfair competition.
The case arose when one of Milliken’s research scientists and its teamleader for the Advanced Yarns Team resigned to start a company to market a new type of fiber. The scientist had developed the idea for the newtype of fiber while working for Milliken, and in the months followinghis resignation he used the idea he developed at Milliken to invent anew fiber. In the suit, Milliken alleged it owned the rights to the new fiber.
The scientist’s employment agreement with Milliken contained aconfidentiality clause that prohibited him from using, disclosing,modifying, or adapting any “competitively sensitive information ofimportance to and kept in confidence by Milliken” for three years afterleaving the company.
The agreement also contained an inventions assignment clause statingthat any inventions by the scientist, patentable or not, relating toMilliken’s business or research – or resulting from work he performedfor the company during his employment – were the property of Milliken. The inventions assignment clause had a “holdover” provision stating that such inventions developed within one year after termination ofemployment also belonged to Milliken. (See the box below for types ofprovisions in employment agreements that can help protect against unfair competition by former employees.)
Milliken sued the scientist for breach of his confidentiality andinventions assignment covenants (as well as for breach of his duty ofloyalty and violation of the South Carolina Trade Secrets Act). Thescientist argued these covenants were invalid because they were legallyequivalent to non-compete agreements, which are disfavored by the courts and strictly construed against employers.
The state Supreme Court affirmed a jury verdict for Milliken, rulingthat confidentiality and holdover inventions assignment agreements arenot the same as non-competes because they do not “restrain trade.” (The jury decided for the scientist on the duty of loyalty and Trade Secrets Act claims.) Confidentiality agreements “seek to restrict disclosureof information, not employment opportunities,” wrote the court. Andholdover inventions assignment agreements “do not operate in restraintof the employee’s trade but merely vest ownership of an invention withthe entity which ought to have it.”
Therefore confidentiality and holdover inventions obligations should beanalyzed under the more lax standard of “reasonableness.” To bereasonable, these restrictions should be “no greater than necessary toprotect the employer’s legitimate interests” and they should not“curtail the employee’s ability to earn a living.”
Viewed under the standard of reasonableness, Milliken’s inventionsassignment clause passed muster because it expressly excluded fromassignment work done without use of Milliken’s resources and on theemployee’s own time as long as it did not relate to Milliken’s businessor R&D. It also excluded inventions that did not result from anywork performed for Milliken. And the one-year holdover was, accordingto the court, “eminently reasonable.”
The confidentiality clause was reasonable because it encompassed onlyproprietary information and did not attempt to restrain the employeefrom using his general skills and knowledge in the future. Thethree-year limit on the restriction was also reasonable, even though, as the court wrote, “the absence of a time limitation in a confidentiality clause will not automatically render it invalid.”
In Milliken, the court made clear it still views non-competesas restraints on trade that will be enforced only if specific criteriaare met. (See “Looking to Hire? Be Careful with Non-compete Deals,” for more on the enforcement criteria for non-competes.)
Confidentiality and inventions assignment clauses, including holdoverclauses, that are so broad and vague they look like non-competes arelikely to be subject to the same strict scrutiny as non-competes. Butif written carefully, as they were in Milliken, these kinds ofprovisions are likely to meet the reasonableness standard and to servetheir intended function of protecting proprietary information.
David Dubberly is certified by the S.C. Supreme Court as a Specialist in Employment and Labor Law. He can be reached at [email protected]. For more general information about employment and labor law topics, visit http://www.nexsenpruet.com/practices-area-45.html.
Contractual Provisions That Can Help Protect Against Unfair Competition
By Former Employees
Confidentiality: Typically prohibit improper disclosure or use of confidential business information learned during employment. (“Trade secrets” as defined by the South Carolina Trade Secrets Act are protected by that statute.)
Inventions assignment: Typically state that certain inventions developed during employment are the property of the employer.
“Holdover” inventions assignment: Typically state thatcertain inventions developed during employment and a specified period of time after employment are the property of the employer.
Non-solicitation: Typically prohibit soliciting employees, customers or suppliers of the employer for a specified period.
Non-compete: Typically prohibit competing with the employer for a specified period.
