Good morning! You walk into your office just like any other day of the week. But today you find something different on your desk: a letter of resignation from one of your most trusted employees.
After you get over the initial shock, you can focus on finding a replacement. But there's another, and perhaps more significant, problem to face. How will your business be affected if the employee goes to work for a competitor? You might rest a little easier if the employee signed a non-competition agreement. Such an agreement may be used to prevent solicitation of your clients or customers and protect the confidential information of your company. Generally, the agreement is signed either as a pre-condition of employment or upon termination (e.g., to enable the employee to receive severance pay).
The logic is simple. Your customers or clients are a valuable asset which has been built up over time through hard work and expense. So you should have the right to protect these relationships as well as your company trade secrets.
However, you can't go too far. In other words, your company generally cannot prohibit a former employee from making a living in the same field or industry. A valid non-competition agreement must distinguish between acts which take legitimate profits from the company and those which 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."
Obviously, the non-competition agreement must be carefully worded. 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 non-competition agreement, the courts may consider the following factors, among others:
- Whether the length of time involved is excessive in light of how quickly the information becomes outdated.
- The scope of the geographic area limiting the employee.
- If the agreement restricts activities not in competition with the company.
- Whether the agreement prevents the employee from working in his or her chosen field.
- The reason for termination of the employee.
A dispute over the violation of a non-competition 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--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 contains 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, no legitimate company interest is being protected. As a result, the agreement probably will not be enforced.
In most cases, courts throughout the country have refused to classify general knowledge in 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 pre-condition to employment.
Reminder: A non-competition agreement commonly accompanies the sale of a business.
Reason: any competition by the former owner or partner might reduce the value transferred to the purchaser. In this situation, it is more likely that an agreement with strict terms will be easier to enforce.