PROTECTING CORPORATE ASSETS Presented By: David M. Cogliano , Esq. CVS Caremark David.Cogliano@CVSCaremark.com Stephen T. Paterniti, Esq. Sarah B. Herlihy, Esq. JACKSON LEWIS LLP Paternis@jacksonlewis.com Sarah.Herlihy@jacksonlewis.com PROTECTING CORPORATE ASSETS How to protect your company’s confidential information, trade secrets, goodwill and other intangible assets

What We Will Discuss What Assets Need Protection? What Tools Do You Have To Protect Those Assets? Sample Contract Clauses

PROTECTABLE INTERESTS

What Are We Protecting? Assets involve more than a company’s real estate and equipment Indeed, many companies have few if any traditional assets. Instead, their value rests in favorable contracts, customer and supplier relationships, and other information about the way the employer does business Employee mobility and technology raise the risk that such assets will find their way to a competitor These assets can and should be protected

Does Your Company Have Assets That Need Protection? Think Broadly. Goodwill with customers, suppliers, distributors “Recipes” – literally or figuratively Financial information Strategic plans, including planned acquisitions “Negative” know-how (knowing what doesn’t work may be as valuable as knowing what does work) Trade secrets, including pre-patent inventions Processes, such as manufacturing processes Client preferences Contract details (pricing, services, expiration dates, etc.) Other confidential information

HOW DO YOU PROTECT THESE ASSETS?

What Tools Are Available To In-House Counsel? Two broad “tool kits” available to protect a company’s intangible assets: Common law and statute Contracts between the employee and employer

Good Practices Generally In addition to the legal tools available, there are certain practical steps a company should take to protect its confidential information. Limit access to confidential information, identify information as confidential (stamp, etc.) and train employees Secure computers and areas where confidential information is maintained, change passwords and codes frequently Manage goodwill to ensure that the relationship is between the company and the customer, supplier, etc., not an individual employee Standard in Massachusetts to protect trade secrets is “eternal vigilance” Courts are unsympathetic to companies who fail to take reasonable steps to protect their own confidential information, or other intangible assets, and then ask the court to take action. Quote from J. T. HEALY & SON, INC. vs. JAMES A. MURPHY & SON, INC.

Protections Absent A Contract Basic tension between an employee’s right to use his/her skill set and the right of employer to protect confidential information/goodwill Most states favor competition and employee mobility Absent a contract, common law generally only restricts an employee from taking and using a former employer’s confidential information (and, for some key employees, breaching a duty of loyalty) Statutory protection may also be available (Computer Fraud and Abuse Act, criminal theft statute, tort statute for theft of trade secrets) M.G.L. c. 266, §30(4) – criminal theft of trade secrets M.G.L. c. 93, §42 – statutory tort theft of trade secrets

Why Have A Contract? Why aren’t the common law protections enough? Hypothetical: Chemist working for Company X does not have a non-compete. This employee is fully aware of Company X’s distinct and very efficient manufacturing process. The chemist leaves to join a direct competitor, Company Y. Suddenly, Company Y has reduced its cost structure, suggesting that it has increased its efficiency. Company X typically cannot prevail by arguing that the chemist “must have” or “inevitably” used Company X’s confidential information to assist Company Y. It will have to prove that the chemist did so – a more onerous burden than proving a breach of a non-compete. In marginal cases, where there is a close question of whether the information is a trade secret, or could have been independently obtained, a contract places Company X in a far stronger position. This slide is meant to start a discussion with some examples of why a contract could be important. We are all likely to have a few examples and should coordinate before the presentation.

Myths About Restrictive Covenants Restrictive covenants aren’t enforceable in any meaningful way Our company doesn’t have any protectable information

Types Of Restrictive Covenant Contracts Non-Disclosure Return employer information (give everything back) Non-Solicitation of employees Non-Solicitation of customers Non-Compete Remind people that a policy is not a contract

General Principles Use clear and consistent language in policies and agreements, as needed, such as: Offer letters Compensation agreements (including sales plans) Equity grants Severance agreements Information provided to third parties provided with confidential information Consideration issues

Factors Decide what you really need; agreements should be tailored to your business and the situation Sale of business v. employee hire Nature of employee’s job Level of employee Industry Types of information at issue Geographic scope of business Length of time of restriction Extent of restraint in employee’s opportunity to pursue his/her occupation Interference with public interest (e.g., homeland security or medical device) Size of business Generally, the more limited and precise the protection, the greater the chance of enforcement. There are circumstances, however, where broad protection is warranted.

Confidential Information/Trade Secrets Confidential Information and Trade Secrets include but are not limited to: Financial and business information (information pertaining to pricing, costs, commissions, fees, profits, sales, markets, mailing lists, strategies and plans for future business, new business, product or other development, potential acquisitions or divestitures, and new marketing ideas); Product and technical information, such as product formulations, new and innovative product ideas, methods, procedures, devices, machines, equipment, data processing programs, software, software codes, computer models, and research and development projects; Any and all information in whatever form relating to any client or prospective client of the Company, such as the identity of the Company’s clients, the names of representatives of the Company’s clients responsible for entering into contracts with the Company, the amounts paid by such clients to the Company, specific client preferences, needs and characteristics, contract expiration dates, terms and conditions, and leads and referrals to prospective clients;

Confidential Information/Trade Secrets Personnel information, such as the identity and number of the Company’s other employees, their salaries, bonuses, benefits, skills, qualifications, and abilities; Any information not included above which Employee knows or should know is subject to a restriction on disclosure or which Employee knows or should know is considered by the Company or the Company’s clients or prospective clients to be confidential, sensitive, proprietary or a trade secret or is not readily available to the public; and intellectual property, including inventions and copyrightable works. Confidential information and trade secrets are not generally known or available to the general public. The following is a non-exhaustive list of specific matters which, in relation to the Company, are acknowledged by Employee to constitute trade secrets, proprietary and/or confidential information and materials and must be treated as such by Employee:

Non-Disclosure Employee agrees, except as specifically required in the performance of Employee’s duties on behalf of the Company or with prior written authorization of the Chief Executive Officer or Chief Operating Officer of the Company, Employee will not, while associated with the Company and for so long thereafter as the pertinent information or documentation remains confidential, directly or indirectly use, disclose or disseminate to any other person, organization or entity or otherwise use any Confidential Information or Trade Secrets. 

Goodwill - General During the course of employment with the Company employees may develop relationships with clients of the Company.  The Company pays for the expenses of salary, benefits, travel, entertainment, and other expenses in developing such goodwill.  As such, Employee understands and agrees that this goodwill is intended to inure only to the benefit of the Company; the goodwill is owned by the Company; and the Company shall be the sole beneficiary of such goodwill during and after termination of the employee’s employment with the Company.

Goodwill – More Detailed The Company devotes substantial resources to identifying the needs of, and to developing and maintaining relationships with, existing and prospective clients.  These clients constitute a substantial part of the goodwill and value of the Company’s business.  While existing and prospective clients may be secured and/or serviced by the Company’s employees, they remain at all times clients and prospective clients of the Company.  In servicing the Company’s existing and prospective clients, among other things, the Company makes available to its employees specially developed and researched insurance industry data and client-specific information, as well as an extensive network of support services.  During the course of employment with the Company, employees may develop relationships with clients of the Company.  The Company pays for the expenses of salary, benefits, travel, entertainment, and other expenses in developing such goodwill.  As such, Employee understands and agrees that this goodwill is intended to inure only to the benefit of the Company; the goodwill is owned by the Company; and the Company shall be the sole beneficiary of such goodwill during and after termination of the employee’s employment with the Company.

Non-Solicitation – Employees Solicitation and Hiring. During the period commencing on (the “Effective Date”) and expiring the ________ anniversary of the termination of the Employee’s employment with the Company for any reason (the “Restricted Period”), the Employee shall not, either directly or indirectly (including through an affiliate), (a) solicit or attempt to induce any person who either (i) was an employee of the Company on the Effective Date ( a “Restricted Employee”) to terminate his/her employment with the Company or (b) hire or attempt to hire any Restricted Employee; provided, that this clause shall not apply to any individual whose employment with the Company has been terminated for a period of six months or longer before the date of the termination of the Employee’s employment with the Company.