Practical Tips for Banks in Navigating Noncompete and Trade Secret Disputes

• Dec 7, 2022

In today?s historically tight, churning labor market, banks and financial institutions are more frequently facing questions and litigation over restrictive covenants (such as noncompete agreements) and trade secrets. With an unemployment rate in the finance industry of 1.3% in August, it is almost certain that the talent you are looking for already has a job. Moreover, many banks require at least their higher-ranking employees to sign restrictions on working for competitors, soliciting customers, and disclosing confidential information. But when banks are faced with a departing employee and want to act on those restrictions, some are finding that the ground beneath them has shifted in terms of what courts will or won?t enforce. There are several steps banks can take to better protects themselves against unfair competition in this labor environment, including updating restrictive covenants and adopting good HR practices to properly onboard and offboard employees. Additionally, when a dispute arises, banks should consider several factors when developing their legal strategy to make sure it is consistent with the best interests of the business.  Even with the law is on your side, company leaders must take into account practical considerations before suing a former employee, competitor or customer who has taken talent or trade secrets. Proactive Steps to Take 1. Revisit Your Restrictive Covenants Regularly If a bank has not updated its form noncompetition agreement in more than five years, that agreement may be out of touch with the latest court rulings or statutory requirements. In North Carolina, for example, courts in recent years have continued to narrow the types of restrictive covenants that they will enforce. For instance, if the work you are trying to prohibit a banker from doing is not narrowly tailored to the work that banker was doing for you, a judge in North Carolina is unlikely to enforce the agreement. In Georgia, courts have relied on the 2011 Restrictive Covenant Act to determine whether noncompetes are enforceable or in some cases modify them to be enforceable. In recent years, the courts have clarified that some covenants are so flawed that they cannot be modified at all to make them enforceable. The law relating to restrictive covenants varies by state, so it can be useful to partner with counsel in multiple jurisdictions who regularly update and litigate restrictive covenant issues to ensure your standard agreement matches current case law. 2. Protect Your Confidential Information To best protect confidential information and trade secrets, banks should focus on their nondisclosure agreements. Some banks may think their trade secrets are already protected through the federal Defend Trade Secrets Act or a state equivalent such as the Georgia Trade Secrets Act. But the important thing to remember is the definition of a trade secret under those laws is set and limited, while a nondisclosure agreement can more broadly protect other types of confidential information. The specific pricing of a financial instrument, for example, may not qualify as a trade secret. But a bank could define that as confidential information subject to its nondisclosure agreement. Banks should think of nondisclosure agreements as strategic tools to offer additional protection for their trade secrets.  Banks should also take proactive measures to protect their confidential information, including password protection, firewalls, and two-factor authentication. 3. Adopt Good Onboarding and Offboarding Processes Furthermore, banks should adopt onboarding and offboarding processes to ensure agreements are legally valid and recognized by the employee. It should be clear to employees that they cannot bring restricted data with them. Employees should sign restrictive covenants, noncompetes and related agreements on or before their first day of employment. That?s because many states require restrictive covenants to be supported by ?new consideration,? such as the promise of a new job, raise, or bonus.  Courts in many states, including North Carolina, have clearly held that continued employment does not constitute new consideration.  In those states, a restrictive covenant signed on the second day of employment is arguably invalid. Additionally, when banks are updating their restrictive covenants for existing employees, they should consider adding a requirement to sign a new agreement into their raise or bonus process. When offboarding employees, banks should ensure that each receives a copy of their existing restrictive covenant and is reminded that the bank takes those obligations seriously.  Such proactive reminders can dissuade employees from violating the terms of a restrictive covenant and remove any defense that the employee was not aware of the restriction. 4. Consider Using Garden Leave Some banks go even further and include garden leave in their agreements with key employees. In essence, garden leave is keeping employees on the payroll ? and away from competitors ? for a period of time after they have submitted their resignation. This is an expensive option, but some in the financial services industry have determined it?s worth it. Courts are more likely to enforce a noncompete that includes payment during the restricted period. And while the employees are ?tending their gardens,? banks have more time to transition their customers and responsibilities. (You can learn more about garden leave here.) Resolving Disputes When a dispute arises over an employee leaving, there are several legal and practical issues for banks to assess. First, you should review the employee?s agreements to see if it meets current law.  There is nothing more disheartening for a business than sending a demand letter or filing suit only to quick discover that a restrictive covenant is likely unenforceable. (On the other side of the coin, banks who gain employees subject to outdated agreements have a lower risk profile.) The second step is reviewing your options to enforce your rights. To start, you might send a cease-and-desist letter demanding the employees stop violating their agreement.  Sometimes this alone can obtain compliance.  Next, you can go directly to court to file a lawsuit. Finally, if you need to ensure immediate compliance to protect the business, the most aggressive strategy is to file a motion for a temporary restraining order (TRO) prohibiting the employee from working in the new job. That tends to be the most expensive strategy, so it should be saved for the most strategically important disputes. Additionally, banks should consider whether federal or state court is a better venue. In North Carolina, for example, a hearing TRO can generally happen quicker in state court. That is not the case in Georgia. But speed is only one element: you should also consider the relevant differences between each state?s law and federal law on restrictive covenants and trade secrets. There are practical considerations as well. Threatening one of your primary competitors over talent and trade secrets can have broader ramifications, as competitors regularly respond in kind with similar legal threats.  The business implications are also important to consider when the dispute involves an employee who has left to work for one of your customers. To state the obvious, threatening a big customer can cause that customer to sever business ties. (You would be surprised how many times we have had to advise against such myopic, damn-the-torpedoes strategies.) Finally, banks should think carefully about the precedent they may unintentionally set by pursuing litigation. If your agreement is ultimately invalidated by a judge ? and you have dozens or hundreds of other employees using the same template agreement ? all of those agreements become invalid immediately. As noted above, the only way to get all those employees into a new agreement is to offer them a raise, bonus, or something else of value. The costs in that instance go far beyond the cost of the litigation. Final Takeaway By combining proactive best practices and strategic thinking when disputes arise, banks can better protect themselves against various forms of unfair competition. The most important step you can immediately take is reviewing your current agreements to ensure they can, in fact, be enforced. That one step today can save significant costs down the road. Tory Summey and David Pardue are part of Parker Poe?s Financial Services Industry Team. Tory is a partner in Charlotte, NC, who focuses on employment counseling and litigation. David is a partner in Atlanta, GA, who focuses on trade secrets and other areas of business litigation. They can be reached at torysummey@parkerpoe.com and davidpardue@parkerpoe.com.

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