Right from the Start - Protect Business Assets with a Non Compete Agreement

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Even though the economy has stabilized, American Recovery and Reinvestment Act (stimulus) money continues to flow into expanding and start up businesses. Now is the time to protect your fledgling business from competitors who will not hesitate to take your innovations, ideas and employees with impunity or to sue you for taking theirs.  Common rationalizations are based on the perception that because the business is not “first in the field” or “big enough," finances don’t justify a trademark, patent, Web site protection or a non-competition agreement. Think about the social media networks that came before Twitter and Facebook. Think about the auction sites before eBay, the search engines before Google. You remember these later companies and not their predecessors because these later companies protected themselves from the outset.  (I cannot name the earlier companies because I don’t know their names.)

This post concentrates on the threat from within. Trade secrets may be taken by a thief in the night, by a hacker, or by an employee who walks across the [virtual] street with your processes, client lists, templates (and even other employees).  If you wait too long, you risk losing everything. The person stealing your company out from under you need not be a stranger. It may be an executive employee or partner. As emphasized in an earlier post, putting your  relationship into a written contract is a sign of trust, not mistrust. Your business is more than a lark – it has its own identity. Take selfless steps to protect that distinction. Stand behind your commitments and clearly define your expectations. Writing is friendly. Writing drastically reduces the likelihood of fisticuffs down the road.

A non-compete agreement may provide everyone with assurance as to expectations and may address a wide range of issues including:

-   For whom a current employee/partner may work in the future.

-   The time limit for that restriction.

-   The penalty for breaking the agreement.

-   Trade secrets that are protected under the agreement.

-   Which state’s law applies to a dispute. [1]

-   The type of work for which the non-compete applies.

-   The type of industry to which the non-compete applies.

-   Distance from original business within which the non-compete applies.

An unfair or ill-conceived non-compete agreement may be modified or ignored by the court. Therefore, your agreement should not contain:

-   Restrictions that last until the employee is greeting customers at Wal-Mart. Many states strike provisions which are unreasonable in duration.

-   Restrictions which prevent the employee from ever touching a computer again. Restrictions need a reasonable underlying justification to be enforceable.

-   Provisions that restrict the employee from ever competing anywhere but Latvia. Geographic restrictions in the agreement must be reasonable.

For employers, my next blog post will explore two additional possible provisions:  1. A non-solicitation agreement with other companies to inhibit the ability to lure away employees.  2. A non-disclosure agreement to provide protection from the leak of proprietary information that an employee may release to a third party without leaving your employment. 

The door swings both ways. If you hire employees with prior industry experience, inquire about the existence of a non-compete or nondisclosure agreement. In some circumstances these may impose liability on an employer.  Often the best workers already know the business and enhance your business with their knowledge. Ask yourself, how did they get to be so good?

Finally, if you already hired your employees before you read this article, offer them something extra for signing the non-compete agreement. Some courts do not recognize non-compete agreements if there is no additional “consideration” offered to the employee to sign a non-compete after employment has begun.

-Christine Branstad

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[1] In California, non-compete clauses are not enforceable based on the premise that non-competes prevent the movement of talent from company to company; such movement promotes a healthy business environment.

Comments

[Ben Stone]

If you need to rely on a non-compete agreement to protect your business, you have no business being in business. I will never sign or force anyone else to sign a non-compete again. Much like tarrifs and other artificial business controls, they prop up that which should not be propped up. The act of limiting someone's livelihood becasue you weren't a good enough employer to retain them as an employee disgusts me. Keep in mind that some companies terminate employees and still try to enforce their non-compete agreement!

CA has it right on this one - I hope more states follow their lead.