Today, many companies possess sensitive information that they need to protect. This information can take many forms, including software code, designs, customer or vendor lists, unique business practices and secret formulas. If you run a company that possesses this kind of information, you need to know how to protect it. This is where non compete agreements come in.
Non Compete Agreements
For many companies, non compete agreements have long been a trusted tool. Of late, however, they have been overused and abused, and now courts are pushing back. You can get into trouble if you blindly rely on traditional non compete agreements, since a court might refuse to enforce it.
The growing unpopularity of non compete agreements has been documented by the Wall Street Street Journal. And an article from Inc. suggests that non compete agreements are just bad for business.
Several courts across the country have rejected non compete agreements that would have previously been enforced. Massachusetts is considering legislation that would restrict a company’s ability to restrain employees. Change is coming.
So what should businesses do?
Use Non Compete Agreements Sparingly or Not at All
Let’s first accept that non compete agreements have been overused. Today, they are almost standard issue in many employment contracts. Your building’s janitor may even have one.
In the past, non competes were properly used. Before the current hysteria, only high level executives or employees with access to company secrets were subject to non compete agreements.
For example, all Coca-Cola employees with access to the soft drink’s secret formula would sign a non compete agreement to prevent them from running off to Pepsi. But since there are no secrets involved in shipping soda, Coca-Cola would not (and would have no good reason to) have its Vice President of Shipping sign a non compete agreement.
Previously, non compete agreements were limited to those who had access to genuinely sensitive information. The smart move is to return to this framework not just because it makes sense, but because judges are more likely to enforce such agreements.
Identify Your Secrets and Who Knows About Them
In order to monitor and protect your sensitive commercial information, it’s important to first organize it in one place. Once this has been done, make a list of who needs to have access to the information and who knows it exists.
The employees on this list – but only those on the list – should be subject to non compete agreements. Companies that do not possess truly sensitive information should not use non compete agreements at all.
Limit the Scope of the Non Compete Agreement
Today, the best non compete agreements are narrowly tailored to cover only the sensitive information and the relevant market.
Take, for example, Blue Ridge Bakery in Bramwell, West Virginia, which uses Betty-Lou’s secret family recipes to bake its bread. The non compete agreements for the company’s bakers (those with access to the secret recipes) must be limited to preventing them from working at other bakeries that might compete in its market, and should cover only one year. Long time periods are frowned upon by courts, especially in fast moving technology sectors where even a year can be considered too long.
If the non compete agreement is too broad, a court might reject the agreement as an unreasonable restraint on trade.
Provide Extra Value to Those Who Sign Non Compete Agreements
Because non compete agreements are extra burdens on employees, some courts now require that employees receive additional compensation in order to enforce the agreement. To be safe, it is wise to offer extra value, such as equity, extra compensation or benefits to employees who are required to sign non compete agreements.
When you offer these extras, however, make sure it is clear that they are being provided in exchange for the non compete agreement.
Use the Right Agreement
If you are worried about a former employee poaching clients or employees when they leave, don’t use a non compete agreement. Instead, use a non solicitation agreement.
Know the Law of Your State
The laws vary among states. California, for example, refuses to enforce non compete agreements because they view them as restraints on trade. Most states, however, will enforce agreements that are reasonable in time, geographic reach and that seek to protect legitimate interests.
How to Economically Create a Non Compete Agreement
Services like Nolo or RocketLawyer let you create legal agreements online for free or at nominal cost ($34.99 at Nolo). One problem with using these services, however, is that enforceability turns on the descriptions that you provide. If you make a mistake, your agreement might not be enforceable.
Therefore, the best approach is to work with an employment lawyer using a flat fee agreement so you know the cost upfront. The cost should not be high because the lawyer’s task is not that complex. They only need to understand your business and draft appropriate descriptions and terms.
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I want to dwell into the app business, and I plan to hire a developer. Naturally, I should have the developer sign a non competing agreement. From your article you suggest that I should hire a lawyer to do it for me.
Do you have any recommendations on where to look for lawyers who are familiar with app business? Can you offer an estimate of the flat fee?
Hi Ivan – what state are you in?
Would you say that having a Non-Disclosure Agreement would be a better option? Or, should you have both? Your post made me think of these questions – out of curiosity. Thanks for sharing these insights though.
Yes a non-disclsorue agreement may be a better option if his only goal is protecting his work product.
I’ve signed dozens of non-compete agreements and they are all useless. A non-solicit is a good option to put into a employment agreement but if it’s your livelihood, you can’t keep someone from competing against you.
Very few companies also stipulate a ‘do-not-train’ the competition clause. Even if you can’t compete directly, there is nothing stopping you from coaching the competition on how to best target your clients.