A Non-Compete Agreement Overview

With today’s high employee turnover and diminishing company loyalty, the risks of having intellectual property, confidential information, and customers walk out the door with ex-employees have grown tremendously. As a business owner, it is vital that you address these risks by developing confidentiality policies and non-compete agreements.

Non-Compete Agreements for your business should be drafted by attorneys so they meet particular company needs, conform to relevant state laws, and are deemed enforceable.

Under a Non-Compete Agreement, an employee agrees not to compete with the employer after employment ends. Confidentiality covenants are generally also included in such agreements. In enforcing such agreements, courts must balance the need to protect its interests with the employee’s need to make a living. Therefore, the documents must be very carefully drafted to ensure enforceability.

There are a few issues to consider when implementing non-compete agreements

Competition

Competition must be carefully defined. In general, the more narrowly this term is defined the more likely it will be able to be enforced. If you define competition as companies in any field related to your industry, you will be too broad in your definition and have difficulty enforcing after an employment split.

Customers

Customers or a specific type of customer must be clearly defined if customer relationships are to be protected.

Goodwill

The good relationship an employee or company has with a customer is an asset that belongs to the company. However, courts closely examine the nature of the employee’s responsibilities and relationship with customers to determine whether goodwill is threatened.

Limit Your Non-Compete Agreement to Key Employees

Key employees with significant responsibilities and/or regular customer contacts are more likely to be restrained from competing. Non-competes for lower level employees are hard to justify.

Confidential Information Must Be Clearly Defined and Identified

The only information that may be protected is confidential information. Courts consider the importance of the information to the business, if the information is otherwise available to third parties, and what restrictions were implemented to prevent its disclosure. Be careful not to be over-inclusive in your definitions of what you consider to be confidential.

Start from the Beginning

Non-compete agreements must be supported by consideration. In other words, employers must give something to the employee in exchange for his/her promise not to compete. Hiring an applicant generally, provides the necessary condition.

After employment has begun, additional consideration may be required, such as a signing bonus, a promotion, or a pay increase. However, such agreements are stronger and more easily enforced if signed at the start of employment.

Agreements

Agreements must be negotiated in good faith and be restricted in time and location. These concerns are particularly important in today’s high-tech environment where information becomes obsolete quickly and markets change daily. In some industries, one year can equate to several generations or an eternity.