[ return to list ]

Why You Need Noncompete Agreements

Common situation: Your business is running smoothly until you lose a fast-rising star or a key staff member to the competition. All of a sudden, you're trying to head off a competitive challenge you had not expected. Even worse: You could easily have avoided the problem if only you had the employee sign a noncompete agreement.

Typically, a noncompete agreement is signed either as a precondition of employment or upon termination (e.g., to enable the employee to receive severance pay). Caveat: Don't overdo things. In general, your company cannot prohibit a former employee from making a living in the same field or industry.

A valid noncompete agreement must distinguish between acts that take legitimate profits from the company and those that are essential to the employee's livelihood. For example, an employee usually will be permitted to compete with an ex-employer on some levels, but prior clients or customers may be off-limits.

Any noncompete agreement should be worded carefully. Typically, the agreement may call for a former employee to refrain from specific acts at specific places for a specific period of time. The enforceability of these terms depends on whether the restrictions are “reasonable” or not.

When judging the reasonableness of a noncompete agreement, the courts may consider

the following factors, among others:

*The length of time the agreement remains in force;

*The scope of the geographic area restricting the employee;

*If the agreement restricts activities not in competition with the company;

*If the agreement prevents the employee from working in his or her chosen field; and

*The reason for termination of the employee.

A dispute over the violation of a noncompete agreement may boil down to two essential factors: (1) what the employee actually knows about your business and (2) his or her course of action. For example, an employee may claim no knowledge of trade secrets or confidential knowledge but only general knowledge of the business. In that case, the burden of proof is on the company to establish that such knowledge is confidential or includes valuable trade secrets.

If a court finds that the employee has only general knowledge or that the agreement was made simply to prevent another company from becoming a more efficient competitor, the court will usually rule that no legitimate company interest is being protected. As a result, the agreement probably will not be enforced.

In many instances, courts throughout the country have refused to classify general knowledge of the industry or trivial differences in practices as trade secrets. In fact, an employee may get the benefit of the doubt because the employer is often perceived to be more powerful. This is especially true if the employee's conduct did not contribute to termination of employment or the agreement was signed as a precondition to employment.

Final words: Frequently, a noncompete agreement will accompany the sale of a business, because competition from a former owner might affect the business valuation. We can provide more details about this process.

[ return to list ]