Have you ever considered what effect the loss of a key employee to a competitor might have on your business. Don't think it will happen to your company? Think again. It will.
Gone are the days when an employee hires in with a company and remains to earn a gold watch. In today's marketplace, movement from one company to another is inevitable. In light of this reality, sooner or later a key employee will announce on a Friday afternoon that he or she will be leaving and starting with your competitor on Monday morning. What has your company done to limit the impact this announcement will have on business?
Hopefully, your company requires key employees to enter non-competition agreements. These agreements are invaluable and will protect your company and its confidential and proprietary business information. However, in order to pass legal muster, such agreements must be properly designed. Careful drafting, proper consideration and inclusion of relevant clauses is of critical importance in the event a court is called upon to enforce such an agreement.
Careful drafting means that the agreement be drawn to protect your company's legitimate business interests. Legitimate business interests that can be protected include your company's relationships with its clients. An employer has a legitimate business interest in limiting the ability of an employee to take advantage of personal relationships the employee developed while representing the employer to the employer's established clients. Another legitimate business interest is protecting trade secrets from being divulged by the employee to a competitor. Lastly, your company has a legitimate business interest in restricting competition from the employee based on skill, experience or talent developed during the period of employment.
In Ohio, an agreement restraining an employee from competing with a former employer is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee and is not injurious to the public. Factors to be considered in determining "reasonableness" include: the absence or presence of limitations as to time and space; whether the employee represents the sole contact with a customer; whether the employee is possessed with confidential information or trade secrets; whether the agreement seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition; whether the benefit to the employer is disproportional to the detriment to employee, whether the agreement operates as a bar to the employee's sole means of support; and whether the employee's talent which the employer seeks to suppress was actually developed during the period of employment.
A non-competition agreement, like any other contract, must also be supported by proper consideration. In Ohio, proper consideration is present where the agreement is entered into by the employee at the time the employee accepts employment. In this situation, a valid exchange of promises occurs: the employee promises not to compete upon termination of employment and the employer promises to hire the employee. Keep in mind, where the agreement was not agreed to by the employee upon his or her initial hire, it must be supported by something more than a promise of continued employment, i.e., an increase in salary or other job-related privileges.
A non-competition agreement should include other relevant clauses. The agreement should include a clause relating to the protection of trade secrets and other confidential and proprietary business information. In Ohio, contractual provisions that restrain employees from misappropriating such information for their own gain are enforceable. The agreement should also contain a clause specifically allowing your company the right to seek an injunction should the employee breach the agreement. The agreement should also provide for the immediate return of all company property in the employee's possession. These are but some of the relevant clauses to consider.
While the loss of a key employee is always disruptive, the disruption will be minimized if proactive steps have been taken to reasonably restrict unlawful competition by the departing employee. Protection of your business interests and client relationships, as well as preventing the disclosure of trade secrets and confidential and proprietary business information, are valuable non-tangibles worth protecting from the inception of the employment relationship with a non-competition agreement. Remember the only thing worse than not having a non-competition agreement to point to in the event a key employee tells you he or she is joining a competitor, is having a non-competition agreement that is unenforceable.
Dan Urban is an attorney at Arter & Hadden LLP and is a member of the firm's Business Litigation Group, the E-Group and the Growth Group. The E-Group and Growth Group are multi-disciplinary group of attorneys who focus their practice on entrepreneurs, Internet, e-commerce and emerging growth companies. Dan can be reached at 216/696-4193 or durban@arterhadden.com. For additional information about the E-Group and to read SBN "Matter of Law" reprints, please visit our website at: http://www.arterhadden.com/egroup.
Reprinted with permission by SBN magazine