Developing premium cannabis and cannabis products is only half the battle for businesses seeking to distinguish themselves in an increasingly competitive climate.  The other half, which requires careful planning, is to protect your business’s goodwill and proprietary recipes, formulas, and methods in order to retain your competitive advantage in the market and ensure customer loyalty. One step businesses can take to protect their trade secrets and customer goodwill from competitors involves the use of employee confidentiality agreements and restrictive covenants.

What is a Trade Secret?

Generally, a trade secret is any formula, pattern, device, or compilation of information used for business purposes and provides a competitive advantage.  It is not only the end product, such as high quality cannabis, but can also include cultivation methods, packaging, or anything else that provides a business with a competitive advantage.

As the term suggests, it is only subject to protection if it is treated as secretive.  A business must take reasonable steps to ensure it retains the trade secret designation.  The formula for Coca Cola is not a trade secret merely because consumers prefer it to the taste of other colas, but rather because of the steps that Coca Cola has taken, over decades, to guard its secret formula.

What is Goodwill?

Goodwill, in turn, is considered a business’s reputation, which makes it preferable to a consumer over industry competitors.  As the cannabis industry continues to rapidly grow, its customers are free to choose where they take their business, and a business’s goodwill is critical to developing and retaining customers.  While goodwill may be an intangible asset, it is, nevertheless, valuable and should be protected.

Protecting Trade Secrets and Goodwill

Using confidentiality agreements and restrictive covenants can protect a business’s trade secrets and goodwill.  An employer can require an employee to sign these agreements as a condition of employment or continued employment.  Agreements should be drafted to meet unique operational needs, relative to business size and scope, and the respective employee responsibilities should be considered when crafting appropriate limitations.  A salesperson, for example, may not directly access business trade secrets, but could build and maintain relationships with customers and have access to customer and supplier lists.  Cultivators, conversely, will inevitably help develop and acquire knowledge about trade secrets, even though customers do not have a direct relationship with them.

The following are recommended terms to include in employee agreements, as warranted and appropriate:

• Confidentiality and Protection of Trade Secrets. An agreement’s confidentiality provision should define the business’s confidential information to include any trade secrets, formulas, recipes, techniques, methods, or other know-how that give the business a competitive advantage.  A confidentiality provision should bar the employee from using – for personal or competitive purposes – or disclosing outside of the company any confidential information belonging to the company.  Any restriction should extend after employment ends, regardless of the circumstances of the employee’s separation.

The existence of a confidentiality agreement will help prove that a business is taking reasonable precautions to protect its trade secrets or information it claims is subject to trade secret protection.  It also provides a method to deter wayward current or former employees from improperly using trade secrets.

• Non-Competition. A non-competition agreement limits an employee’s eligibility to seek alternative employment after leaving an employer.  It is a useful manner to limit the risk of a departing employee taking the business’s customers with him or her, thereby eroding goodwill.  The right of a business to restrict its departing employees’ rights to work, however, is constrained, and the scope of a non-competition provision must always be readily justifiable to protect legitimate business interests.  This is particularly true in a narrow industry such as cannabis, where opportunities to work may be limited.

Whether a non-competition agreement is enforceable depends largely on its breadth and the business’s legitimate interests.  To ensure its enforcement, a non-competition provision should be carefully tailored by subject matter, geographic scope, and temporal scope, based on unique business needs.

• Non-Solicitation. A non-solicitation provision may be equally powerful in protecting customer goodwill.  In the absence of a binding non-solicitation provision, a departing employee could work in concert with a competitor to poach other employees to join him or her, thereby disrupting relationships that the business has cultivated with customers and suppliers.

Including a non-solicitation provision to prevent a former employee from raiding a business is a common method to guard against this risk.  Similarly to a non-compete, this provision should contain geographic and temporal scopes based on business needs.

• Right to Injunctive Relief. Finally, language should be included stating that a violation of any of the above provisions will cause irreparable harm to the company and allow the company to seek injunctive relief.  This puts the employee on notice that his or her failure to abide by these terms will result in imminent court action.

Enforcement

A business faced with a current or former employee who improperly uses company information should react immediately and aggressively to ensure that the information misappropriated retains its trade secret protection.  In addition to any claims under an agreement with the employee, state and federal law claims may also exist against such an employee.

The enforceability of non-competition and non-solicitation provisions will largely depend on the extent to which they are reasonable and justifiable based on legitimate business interests.  The reasonableness of the subject matter, the geographic scope, and the temporal scope of any restrictions will be factors in weighing the reasonableness of the provisions, and what is reasonable may vary widely depending on the jurisdiction.

Working with counsel, particularly an attorney who is knowledgeable in your jurisdiction(s) of operation, can help ensure that any agreement is drafted in a calculated manner to protect trade secrets and/or goodwill and ensure an appropriate court enforces its restrictions.  Your attorney can also update you regarding local developments in laws governing restrictive covenants, an area of law that frequently changes state-by-state.