Non-competition agreements are restrictive contracts between employers and employees that 1) prohibit workers from revealing proprietary information about the company to competitors or other outsiders, or 2) forbid workers from themselves competing with their ex-employer for a certain period of time after leaving the company. Non-competition agreements are important tools that small business owners may wield to ensure that key personnel do not walk off and establish a competing business on the strength of knowledge and contacts that they gained during their stint at the small business in question. These documents have significant deterrent value in many situations, and business owners are encouraged to secure such agreements with employees who have access to sensitive proprietary information company information (this may include any aspect of a business's operation, including production formulas, processes, and methods; business and marketing plans; pricing strategies; salary structure; customer lists, contracts; intellectual property; and computer systems.).
These agreements, which are also sometimes called confidentiality or nondisclosure agreements, typically define confidential information, identify ownership rights, and detail employee obligations to ensure that confidentiality is maintained. But there are definite limits on the scope and duration of such covenants. "Employers generally cannot use noncompete agreements to keep employees from practicing their trade or profession indefinitely," noted Susan Gaylord Willis in HRMagazine. "Particularly if the former employees were experienced in the specified occupation before they were hired." But while employees generally have every right to make use of skills and experiences gained in one company when they set off on the next stage of their lives, it is illegal for them to make off with trade secrets of their former place of employment.
Nonetheless, business owners do not always win court cases against ex-employees who pilfer in this area. In some cases, they lose for the simple reason that the business owner "never identified the company's confidential or trade secret information," noted the Entrepreneur Magazine Small Business Advisor. "An ex-employee does not have the right to steal company confidential information or trade secrets that are identified as such; however, the ownership of information developed through company procedures must clearly differentiate what belongs to the employee and what to the company."
More often, however, courts throw out non-competition agreements out of concerns that such clauses constitute restraints of trade or that they force prospective employees to choose between signing or continuing their job search elsewhere. "In deciding whether to enforce a noncompete agreement," said Willis, "courts generally focus on: Whether the covenant is ancillary to a valid employment contract [and] whether the agreement imposes reasonable restrictions in terms of time and geography."
ENFORCING NON-COMPETITION AGREEMENTS
Non-competition covenants are usually enforced by the courts if they are reasonable with respect to time and place and do not unreasonably restrict the former employee's right to employment. Of course, different parties have different conceptions of what constitutes a "reasonable" restriction. Legal experts contend that the courts are far more likely to side with the business owner if he or she does not go overboard on imposing restrictions in the following areas:
* Nature of prohibition—Restrictive covenants often are shaped with an eye toward the type of position that was held by the employee. Companies are more likely to target high-level managers or executives for stringent noncompete measures than programmers, writers, architects or other staffers with specialized skills who have less overall knowledge of the company.
* Duration of agreement—Non-competition agreements are less likely to be enforced if they go beyond one year or so. In addition, Willis notes that businesses should consider imposing relatively short durations if the agreement stipulates a wide geographical scope "because the courts are unlikely to sustain a provision that leaves former employees with no way to earn a living in the field in which they are most experienced."
* Geographic area—While it is generally recognized that small business owners have a right to request competition protection from ex-employees in the immediate area in which they operate, stipulations that forbid ex-workers from setting up a similar business in some distant geographic area or region are likely to be overturned unless the company conducts business in a multi-state area or nationally.
* Restrictions on Solicitation—"Who is the employee prohibited from soliciting?" asked Small Business Reports. "Is it customers whom the employee personally acquired or any or your company's customers? The narrower your restriction, the more likely a court will enforce it."
* Restrictions on contacting other employees—The courts generally consider it unfair competition for one company to induce employees of another company who have acquired unique technical skills and secret knowledge during their employment to terminate their employment and use their skills and knowledge for the benefit of the competing firm. In such a case the plaintiff company could seek an injunction to prevent its former employees and the competing company from using the proprietary information.
Business owners should keep in mind, however, that attitudes toward noncompetition agreements vary considerably from jursidiction to jurisdiction. No federal statutes exist to regulate these types of agreements with former employees, unless the restrictions violate existing antidiscrimination laws. Instead, each state has its own unique state contract laws. Some courts adhere to a "blue pencil" rule, meaning that they have the authority to edit unduly restrictive agreements so that the scope and/or duration of the agreement is lessened without throwing out the entire contract. Jurisdictions without such options in place, however, typically uphold the agreement in its entirety or strike it down entirely, leaving the employee free to pursue any course he/she wants. Given this reality, the smart business owner will make sure that he/she is cognizant of the legal philosophy that is prevalent in the state (or states) in which the company conducts its business.
One way in which the business owner can minimize the danger of having a noncompete agreement overturned in court is to create unique noncompetition agreements for each employee affected. "Rather than using a 'one-size-fits-all' covenant, analyze the danger that the restrictive covenant should be designed to protect against," advised Willis. "A company that performs services locally, such as a linen supply or janitorial company, may need protection against pirating of customers in its area of operation. In that case, the company would want a covenant that would be of long duration, perhaps two years, but limited geographically to the city, county, or metropolitan area. On the other hand, a company in a fast-moving field that sells nationally or internationally, such as a software publisher, might need a worldwide noncompete of only six months' duration. The reason is that by the end of six months, any proprietary information gleaned from the employer would be public knowledge and/or obsolete, and its disclosure would be harmless."