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Conflicts Of Interest:
Avoid Them With Written Standards

To a lawyer, a conflict of interest is “a situation in which regard for one duty leads to disregard of another...or might be reasonably be expected to do so.” (Barron’s Law Dictionary, second edition) To an employer, a conflict of interest occurs whenever an employee’s personal activities and interests interfere with the company’s business or put the company in an embarrassing light.

Gifts

Although vendors, contractors and other organizations that want to do business with you are probably not offering your employees lodging in the Lincoln Bedroom, they may occasionally tempt your employees with meals, tickets to sporting events and other gifts. Having a written conflict of interest standard can help you avoid potential problems and misunderstandings.

The following standard was reprinted with permission from Sutter Health’s Standards for Business Conduct handbook. It provides a clear, understandable guideline on what is acceptable behavior. We recommend you create a similar standard for your own purposes.

STANDARD: Avoid conflicts of interest and the appearance of conflicts of interest. DESCRIPTION: A conflict of interest occurs if an outside interest or activity may influence or even appear to influence your ability to exercise objectivity or meet your job responsibilities for Sutter Health. Participation in activities that conflict with your employment responsibilities at Sutter Health is not acceptable. A good rule of thumb is that a potential conflict of interest exists any time an objective observer of your actions might wonder if these actions are motivated solely by your responsibilities to Sutter Health. Sutter Health employees and their families are prohibited from soliciting or receiving gifts, loans, entertainment or any other considerations of value from a person or organization that does business or may want to do business with Sutter Health. If a Sutter Health employee receives any substantial gift or favor, it must be returned and the employee’s supervisor notified. The only exception is a gift of nominal value extended as a business courtesy, such as sales promotion items or occasional business-related meals or entertainment of modest value. In no case may a Sutter Health employee accept a gift or consideration of more than nominal value or any cash payment from a patient. In no case should a Sutter Health employee offer or give any gift or any consideration of value that may appear to be intended to influence the objective judgment of anyone outside of Sutter Health. If you could not accept a gift or consideration within Sutter Health guidelines, do not offer one.

Outside Employment

Some employers make it a policy to prohibit outside employment for their employees, but doing so may violate an employee’s privacy rights and rights to control his/her own free time. However, you may be within your rights to prohibit an employee from working for a competitor if doing so would jeopardize your company’s trade secrets.

Noncompete Agreements

Some employers require their employees to sign noncompete agreements, which state that the employee agrees not to work for a competitor or set up a competing business for a specified period, such as one year, after leaving the company’s employ. In a business sale situation, the buyer of a business can enforce a noncompete covenant against a seller who (1) sells a substantial interest in the business, and (2) transfers goodwill to a buyer. This protects the buyer from competition that would diminish the value of the business purchased. Noncompete agreements may also be enforceable when used in a dissolution of partnership, as long as the remaining partners need the covenant to protect their interests. In these cases, the noncompete agreement must be limited in scope, time and geographical area.

Business sales are one matter; employees are another. In California, Section 16600 of the Business and Professions Code voids any contract that would prevent a person from “engaging in a lawful profession, trade or business of any kind.” Further, California case law has found that employer’s trained and talented employees are not the employer’s trade secret, so you cannot prevent them from going to work for a competitor.

Protecting Proprietary Information

Although you can’t prevent past employees from competing with your business, you can prevent them from competing unfairly. During their employment, many employees have access to your “trade secrets.” These include formulas, processes, patterns or machines used in a business that give the user an advantage over its competitors.

Marlene Muraco, an attorney with Littler Mendelson, an employment law firm, says that California Civil Code Sec. 2426.1(d) protects the trade secrets of California businesses whether you have a written agreement with employees or not; however, what is and is not a trade secret may become an issue if a dispute goes to litigation.

You can avert problems by having employees agree, in writing, not to disclose or use trade secrets. (See sidebar below for sample.) The policy should define a trade secret and “confidential information” and outline the penalties for using trade secrets without the company’s permission. These penalties include injunctions to stop the use of the trade secret, plus monetary damages. While not necessary to protect your legal rights, putting your policy in writing or having employees sign an “agreement not to compete unfairly” may have deterrent value. Just be sure your definition of “confidential information” isn’t overly broad; you may want to have an attorney specializing in employment issues draft an agreement specific for your company’s needs.

Then, to further protect your proprietary information, be sure to stamp documents containing confidential information “confidential,” limit access to a need-to-know basis, and store them in a safe place.

For more information on protecting your company’s trade secrets and confidential information, contact an attorney specializing in this area. 

riskVue | The webzine for risk management professionals
January 2001