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Should your company use non-compete agreements?

For many companies, non-compete agreements are employed to protect intellectual property, client information, trade secrets, business plans, etc. If, for example, a tech company trains its employees to make valuable creative contributions to its product line, it cannot permit those employees to take their training, knowledge, and expertise to another employer.

Imagine what would happen to a company if an employee developed a unique new computer chip, then left the company with the knowledge of how to re-create that chip. The company would lose a significant competitive edge in the marketplace.

Here’s another example: One of my clients invests heavily to train his employees to use sophisticated machinery. Once trained, those employees are not expected to leave and seek employment with a competitive company.

His employees represent a significant value, and their non-compete agreements not only reduce the likelihood that they will leave, but also reduce the likelihood of employee-poaching by other companies.

If an employer wants to restrict an employee from seeking employment with a competitive company or starting his or her own business, a non-compete agreement, if reasonable, can prevent that from happening.

Growing use, growing litigation

Non-compete agreements, along with nondisclosure agreements, have been used in virtually every segment of corporate America and have benefited employers, employees, and consumers. In fact, non-compete agreements have become so prolific that they are now being employed by hair salons, nail salons, group medical practices, and rehab centers, among other personal service industries.

As the use of non-compete agreements has been increasing, though, so has the litigation surrounding them.

There are only two states in the U.S. that ban non-compete agreements outright: California and North Dakota. However, even where non-compete agreements are permitted, courts will either invalidate or modify overly restrictive conditions, including the geographic boundaries and the length of time specified.

“Reasonableness” is the watchword for such agreements. There must be a legitimate business interest for a non-compete agreement to be judged reasonable, and its geographical scope and duration must also be considered reasonable.

Thus, if you decide to use non-compete agreements, it is essential that you know how such agreements must be structured and what type of agreement is appropriate for your workforce.

What’s reasonable?

Because an employee non-compete agreement may be challenged, it is essential that it be carefully drawn.

The non-compete agreement must spell out for how long the employee will not be permitted to compete with his employer and the geographical area to which the agreement applies.

As stated above, the terms must be reasonable; the agreement should be designed solely to protect your company’s legitimate business interests. You will want to protect proprietary information, valuable intellectual property, your client base, and prevent star employees from taking their talents to other companies for a fixed period of time.

So that your non-compete agreements are judicially upheld each one must be reasonable as to time and space. In other words, the agreement should restrict an employee for a reasonable amount of time and confined to a geographical area where you do business.

If, for example, you do business in the east, it would be unreasonable for you to restrict a former employee from gaining employment with a company that does business only in the west. In addition, effective non-compete agreements place limits on employment with specific kinds of companies and industries.

Other types of restrictions

Not all agreements are the same. In addition to the employment scenarios described above, the seller of a business may be required to sign a non-compete agreement agreeing not to compete with the new owner’s business for a clearly specified period of time.

— Non-solicitation agreements. Another form of agreement restricts a former employee from soliciting co-workers and existing clients to go to a new company. In many cases, a star sales person could do significant damage to a business by taking clients to the new company. A non-solicitation agreement is designed to prevent that from happening. Such agreements readily apply to a variety of service businesses where there is a personal relationship with an employee and clients or patients. Many companies require supervisory personnel to sign non-solicitation agreements.

— Non-disclosure agreements are widespread in the high tech, bio-tech and pharmaceutical industries as well as in any industry where formulas, designs, inventions, patents and trade secrets are used to create proprietary products. The agreements are written to prevent employees from stealing valuable information. A confidentiality agreement gives an employer the leverage to litigate to recover losses. In addition, the plaintiff may seek an injunction to prevent stolen material from being used or given to others.

In the highly competitive and mobile world of business, the various restrictive agreements described in this article can provide a company with the necessary legal means to remain profitable, safe, competitive, and successful.

Howard Kurman is a principal and co-founder of the mid-Atlantic law firm of Offit Kurman. He chairs the firm’s labor relations and employment law department. The firm’s website is www.offitkurman.com. 

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