For many manufacturing companies, non-compete agreements are employed to protect intellectual property, client information, trade secrets, business plans, etc. If, for example, a company trains its employees to make valuable creative contributions to its product line, it cannot permit those employees to take their training, knowledge, and expertise to another employer. Imagine, for a moment, what would happen to a company if an employee developed a unique new computer chip and then left the company with the knowledge of how to re-create that chip. The company would lose a significant competitive edge in the marketplace.
Here’s another example: One of my clients invests heavily to train his employees to use sophisticated machinery. Once trained, those employees are not expected to leave and seek employment with a competitive company. His employees represent a significant value, and the non-compete agreements that his employees sign not only reduce the likelihood that they will leave, but they also reduce the likelihood of employee poaching by other companies.
Non-compete agreements, along with non-disclosure agreements, have been used in virtually every segment of Corporate America and those agreements have benefitted employers, employees, and consumers. It has been my experience that the number of businesses that are writing non-compete agreements is increasing and the number of lawsuits brought by employers for breach of those agreements is also increasing. In fact, non-compete agreements have become so prolific that they are now being employed by hair salons, nail salons, group medical practices, and rehab centers, among other personal service industries.
There are only two states in the United States that outright ban non-compete agreements: California and North Dakota. However, in states where non-compete agreements are permitted, courts will either invalidate overly long non-compete periods or modify such temporal restrictions to reasonable periods. Reasonableness is the watchword for such agreements. There must be a legitimate business interest for a non-compete agreement to be judged reasonable, and its geographical scope and duration must also be considered reasonable.
If you decide to use non-compete agreements, it is essential that you know how such agreements must be structured and what type of agreement is appropriate for your workforce.
To begin, as stated above, a non-compete agreement must be reasonable; it should be designed solely to protect your company’s legitimate business interests. You will want to protect proprietary information, valuable intellectual property, your client base, and prevent star employees from taking their talents to other companies for a fixed period of time. So that your non-compete agreements are judicially upheld each one must be reasonable in time and space. In other words, the agreement should restrict an employee for a reasonable amount of time and confined to a geographical area where you do business. If, for example, you do business in the east, it would be unreasonable for you to restrict a former employee from gaining employment with a company that does business only in the west. In addition, effective non-compete agreements place limits on employment with specific kinds of companies and industries.
Following are the primary restrictive employment agreements typically utilized by employers:
These agreements are used in two circumstances:
1. If an employer wants to restrict an employee from seeking employment with a competitive company or starting his own business, a non-compete agreement, if reasonable, can prevent that from happening. The non-compete agreement must spell out for how long the employee will not be permitted to compete with his employer and the geographical area to which the agreement applies. Because such agreement may be challenged, it is essential that it be carefully drawn.
2. When selling a business, the seller may be required to sign a non-compete agreement in which he agrees not to compete with the new owner’s business for a clearly specified period of time.
A non-solicitation agreement restricts a former employee from soliciting co-workers and existing clients to go to a new company. In many cases, a star sales person could do significant damage to a business by taking clients to the new company. A non-solicitation agreement is designed to prevent that from happening. Such agreements readily apply to a variety of service businesses where there is a personal relationship with an employee and clients or patients. Many companies require supervisory personnel to sign non-solicitation agreements.
Non-disclosure agreements are widespread in the high tech, bio-tech, and pharmaceutical industries as well as in any industry where formulas, designs, inventions, patents, and trade secrets are used to create proprietary products. The agreements are written to prevent employees from stealing valuable information. A confidentiality agreement gives an employer the leverage to litigate to recover losses. In addition, the plaintiff may seek an injunction to prevent stolen material from being used or given to others.
In the highly competitive and mobile world of business, the various restrictive agreements described in this article can provide a company with the necessary legal means to remain profitable, safe, competitive, and successful.
Howard Kurman is a principal and co-founder of the mid-Atlantic law firm of Offit Kurman. He chairs the firm’s labor relations and employment law department. The firm’s website is www.offitkurman.com.