Safeguarding Intangible Assets Through Restrictive Covenants

Michael D. Moberly   November 23, 2012

The broad intent of this post is multifold, i.e.,

  •  address (examine) personnel restrictive covenants in a way that
  • recognizes their contributory role in safeguarding company’s most valuable intangible assets, and
  • encourages senior security, HR, c-suite, and legal executives to recognize the necessity for collaboration insofar as formulating specific, transparent,  and defensible restrictive covenants.

Intangible assets are now the globally universal and dominant sources of most company’s value,  revenue, profitability, and sustainability.  Conservatively, 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, profitability, and sustainability lie in – evolve directly from intangible assets.

So, whether one is a senior security executive or part of a company’s expanding (c-suite) management team, the objective is to help a company and/or client build and maintain a profitable and on-going concern of which an integral obligation, be it cast as a fiduciary responsibility or in a contractual context, is to contribute to safeguarding those (intangible) assets by sustaining control, use, ownership, and monitoring their value and materiality throughout the assets’ respective life, value, and/or functionality cycle.

Intangible assets include not only conventional forms of intellectual property, i.e., patents, trademarks, and copyrights, but also a company’s trade secrets, along with an array of proprietary innovation and unique operational knowhow in the form of (a.) intellectual, (b.) structural, and (c.) relationship capital.

Speaking from 20+ years of experience, in part, because intangible assets are intangible, i.e., non-physical, their vulnerability to misappropriation, theft, infringement, etc., seldom tidily fits conventional risk management – prevention regimes which, in most instances are designed for tangible-physical assets.   One consequence to this ‘un-tidiness’ is that the full extent of intangible asset losses, compromises, thefts, and misappropriations, etc., are more likely to go un-noticed, unreported, or objectively measured.

This situation will likely persist unless and until companies formally recognize their intangible assets and design – put in place effective processes and procedures to consistently identify, assess, safeguard, and monitor the value, materiality, and vulnerability of key revenue – competitive advantage driving intangible assets.

The Preliminary Injunction Hearing

In my view, processes, procedures and restrictive covenants to safeguard companies intangible assets should be designed and implemented based on an inevitability not merely a probability, that asset risks – threats will materialize and reach the point that legal action is warranted to try to recover control, use, ownership, value, competitive advantages, and market space of misappropriated, infringed, stolen (intangible) assets.

Legal action will almost always involve a (preliminary) injunction hearing in which the plaintiff’s primary objective is to very ably and convincingly demonstrate, to the satisfaction of the court, that all that could be reasonably expected and necessary, in accordance with existing standards and/or best practices was in place and fully implemented, i.e., relevant procedures, policies, and practices to effectively and consistently safeguard a company’s key intangible assets.

From legal counsel (plaintiff’s) perspective, the most important outcomes of a (preliminary) injunction hearing are that…

  • the court recognizes the cause is just, i.e., the allegations counsel make are well founded and convincing, and,
  • there is clear evidence that intangible assets developed, possessed, and used by plaintiff have been compromised, stolen, misappropriated, and,
  • those assets have specific and contributory value to plaintiff’s company, i.e., in the form of competitive advantages, brand, reputation, sources of revenue, etc.

For the plaintiff (victim company) a grant of injunctive relief can impede, stop, or at least minimize additional (asset) value and competitive advantage hemorrhaging and market space erosion relative to the stolen and/or compromised (intangible) assets.  A favorable injunction ruling is important to the plaintiff company because experience clearly suggests that asset hemorrhaging in all its forms has already commenced, in most instances, immediately following the perpetration of the adverse act itself.

This means that quantifying asset value losses, competitive advantage hemorrhaging, and market space erosion that have occurred as a result of the alleged illegal act can be very useful evidence presented in preliminary injunction hearings.  That is, providing of course, the assessments are readily distinguished as being linked to the (specific) alleged adverse act and not to other coincidental or irrelevant market forces or events or operationally poor or non-existent safeguards, both of which defendant’s counsel will surely seek to draw attention.

Plaintiffs of course, seek expedited preliminary injunction hearings, due largely to…

  • its implication that plaintiff company had asset monitoring practices in place that provided timely notification of circumstances (economically, competitively) adverse to the company’s intangible assets, and
  • the high probability, as already conveyed, that asset value hemorrhaging and market space erosion has and will persist, if not surge up and to the time a favorable injunction ruling may be granted.

Make no mistake though, regardless of the preliminary injunction hearing outcome, asset holders should not assume any/all asset hemorrhaging will immediately cease, for we are talking about a truly global business economy comprised of literally thousands of ‘legacy free’ players who not only disrespect but genuinely feel immune to western law.

Restrictive Covenants: Non-Competes, Non-Solicitation, and Confidentiality

Embedded throughout this post is the genuine intent that important foundations are laid that will  encourage senior security executives, management team members, HR, and legal counsel to collaborate in advance to formulate viable, defensible, and transparent restrictive covenants to mitigate, if not prevent ‘insider’ (employee) initiated acts of (intangible) asset theft, misappropriation, or infringement, etc.

Having well-articulated, explained, current, and transparent restrictive covenants in place can increase the probability that a court (in a preliminary injunction hearing) will grant the preferred outcome i.e., injunctive relief against the alleged perpetrator(s).

Restrictive (personnel) covenants essentially constitute strategies for contractually safeguarding a company’s information-based (intangible) assets and generally exist in three forms and are intended to…

  • Non-compete – prohibit/restrict current – former employees from re-engaging in employment related to one’s former position (occupation, profession) in a particular geographic area for a specific, but often limited period of time following either their voluntary departure or termination.
  • Non-solicitation – deter, but preferably prevent, about-to-be dismissed or voluntarily separated employees from soliciting customers or colleagues from their former employer for a specified period of time.
  • Confidentiality – protect an employer’s confidential, proprietary information, operational knowhow, and/or trade secrets from being improperly (or illegally) disclosed or used following an employee’s voluntary departure and/or dismissal.

Comments regarding my blog posts are encouraged and respected. Should any reader elect to utilize all or a portion of this post, attribution is expected and always appreciated. While visiting my blog readers are encouraged to browse other topics (posts) which may be relevant to the circumstance.  And, I always welcome your inquiry at 314-440-3593 or [email protected]

Please watch for Mike’s book ‘Intangible Assets: Security Managers Roadmap’ to be published soon!


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