Protecting your Business through Noncompetition and Confidentiality Agreements

As you walk into your office one morning, you notice a letter on your desk. One of your key sales employees has announced that he is resigning and going to work for one of your fiercest competitors.

As you read the letter, you realize that your employee knows some of the most important and secret information about your business. To train and promote his sales efforts, you provided him with confidential information about your customers, pricing structure, marketing plans, and product development strategy. You also encouraged him to develop close personal relationships with many of your best customers. When the employee goes to work for your competitor, you have no doubt that the employee will reveal your confidential information and solicit your customers.

In the situation described above, advanced preparation makes all of the difference. If you have done nothing to protect your rights, the law will usually allow the employee to go to work for your competitor and solicit your customers. In that situation, it will also be very difficult for you to stop your employee from revealing your confidential information.

1. Confidentiality Agreements

Oregon law prohibits an employee from revealing any of a former employer's "trade secrets" to a competitor. However, it is often difficult for the former employer to prove that the information was secret and the employee had a duty not to disclose it. For example, although you believe that your customer list is confidential, your employee would argue that your competitors and everyone in your company knows who your customers are.

To protect your confidential information, it is very important to have confidentiality agreements with any of your employees who have access to your confidential business information. The agreement helps define confidential information and requires the employee to protect your information and not reveal it to others. Although having a confidentiality provision in your personnel manual helps, it is best to have each of your employees sign confidentiality agreements. An employer can require both current and new employees to sign a confidentiality agreement as a condition of continued employment.

2. Noncompetition & Nonsolicitation Agreements

A noncompetition agreement prevents your employee from going to work for a competitor for a specified period of time. A nonsolicitation agreement prevents your employee from soliciting your customers for a specified period of time. These agreements can be very helpful in protecting your business information and customer relationships.

There are only two times when the law allows an employee to sign a noncompetition agreement. The first is on or before the employee's first day of work for your company. The second is at the time of a substantial promotion or pay increase. If a current employee signs a noncompetition agreement at any other time, it is not enforceable. In contrast, some courts will enforce a nonsolicitation agreement even if it is signed at other times. However, to improve the chances of enforcing the nonsolicitation agreement, it is best to have employees sign it when they first start work or receive a substantial promotion or pay increase.

Courts will refuse to enforce a noncompetition or a nonsolicitation agreement that is unreasonable as to geographic scope or to length of time. What is "reasonable" depends on the circumstances of each job.

As to geographic scope, it is important to look at the scope of your company's marketing efforts. For example, a dentist who hires an associate probably would not be able to enforce a noncompetition agreement that prevents the associate from practicing dentistry anywhere in the United States. However, a large manufacturer of a specialty product or an interstate trucking company might be able to enforce such a provision.

As to time, the focus is on how long it would take your competitor to develop the information and customer relationships that you seek to protect. Courts will almost never enforce lifetime or extended (10 years or more) competitive restrictions. However, courts often enforce restrictions of 1-2 years. What is "reasonable" also depends on the type of business you are in.

3. Enforcing Noncompetition and Confidentiality Agreements

If you have an enforceable agreement with your employee, you can demand that the employee comply with the agreement. If the employee re-fuses, you may be able to obtain an injunction preventing the employee from violating the agreement. The employer may also be able to sue for damages arising from the employee's violation of the agreement. In some cases, the company hiring your former employee may also be subject to liability.

It is very important to have a lawyer prepare your confidentiality and noncompetition agreements. The former employee will look for any weaknesses in the agreement that might make it unenforceable. Therefore, it is critical that the agreement be carefully drafted to comply with the law. The agreement should also contain provisions that improve your company's strategic advantages in litigation.