Do I Need a Non-Compete Agreement?

Non-compete agreements protect employers from losing valuable customers, trade secrets, and employees. Here’s some basic guidance to make sure your agreement holds up in court. After losing scores of valuable customers, employees and trade secrets to competitors, a growing number of employers are asking or requiring employees to sign non-competes. By signing a non-compete agreement, an employee typically promises not to work for a competitor for a specific period after they leave employment. Here’s the lowdown on whether it’s worth asking your employees to sign one and how to create an agreement that will pass muster with a court.

Different jurisdictions support different types of non-competes. For example, Maryland, DC, and Virginia have different rules relating to how they protect businesses. If it is well-written, a non-compete is going to keep your business from losing employees and customers and will protect the company’s confidential information. So, if one of your employees has access to sensitive business information or trade secrets, you’re going to want to prevent them from disclosing the information that gives your business a competitive advantage (see our previous post on NDA’s or non-disclosure agreements). When an employee with access to trade secrets leaves either because they quit or have been fired, they could take the information and use it to their personal advantage and at your expense at a new job. Particularly if an employee was fired, they’re not going away happy.

For example, let’s say a former employee opens a competing business down the street or goes to work for a competitor and deliberately divulges your trade secrets. A properly drafted non-compete agreement with non-disclosure provisions will allow you to stop this from happening. On a side note, covenants not to compete with employees are not enforceable in California since California state statutes invalidate non-competes in employment relationships except in very limited circumstances. California judges aren’t going to enforce non-competes against an employee, but there’s an exception. Employers can use what are called non-solicitation agreements and NDAs to protect the trade secrets, client lists, and employees, should an individual that is no longer employed by you attempt to capitalize on inside information.

Non-compete agreements are an effective way to protect your trade secrets but, it’s important to note that the various states’ legal systems put a high value on a person’s right to earn a living. So, if the non-compete agreement ends up under a legal microscope, it better pass the legal systems’ checklist.

First and foremost, you must have a good business reason for asking the employee to sign the non-compete agreement. It shouldn’t punish an employee for leaving the company and usually the business reason is to protect trade secrets or the customer base that you’ve spent a lot of time and money developing. Therefore, if you’re selective about which of your employees sign non-compete agreements, you’ll up your chances of success, because judges are more likely to enforce non-compete agreements against employees who truly possess insight.

A non-compete that is linked to a particular employee benefit may be more enforceable than one that is not linked. If you provide a benefit to the employee like a stock option, restricted stock, deferred compensation or additional compensation in exchange for the employee’s promise not to compete against you, it’s going to have a better chance in court since the employee is receiving an economic benefit. It’s much more difficult to provide an existing employee with a benefit but generally coupling the agreement with a promotion or a raise may do the trick.

The non-compete agreement also must be reasonable. This means that the agreement can’t last too long in terms of time or be too restrictive in terms of geography or scope. One that covers too wide of a geographic area, or restricts the former employee from engaging in too many types of business activities may be construed as being overbroad and therefore an unlawful restraint on the employee’s ability to earn a living. Another issue that affects enforceability is how long the non-compete agreement lasts. Non-competes that range from six months to two years may be considered more reasonable than those with longer terms.

When an employer is putting together a non-compete agreement, there are a few things that they should think about. It’s important to be sure you can come up with a valid business reason for asking the employee to sign the non-compete agreement. When you’re deciding whether to ask an employee to sign a non-compete think about your goals:

  • Is the employee so valuable and have you spent so much money training them that losing them to a competitor is going to damage your business?
  • Does the employee have access to trade secrets?

As tempting as it might seem to create a tough agreement where you restrict the activity of the employee completely, it doesn’t pay to be overreaching because most courts are not going to enforce unreasonable non-compete agreements. Instead, try to create an agreement that’s meaningful to you but still has teeth to prevent you from losing your trade secrets or your business. If you’re reasonable, the law will be on your side.

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