How to Handle Non-Competition and Other Agreements

Making sure your employees maintain the confidentiality of valuable company information (such as customer lists, trade secrets, and other proprietary data) can be a challenge, both during the course of an individual’s employment with the company and after the employee leaves the company. To help ensure that confidential information remains confidential and that former employees do not use the knowledge gained while working for you to the advantage of another employer, you may consider requiring that certain employees sign non-competition and other agreements prohibiting them from:

• Working for a competitor or engaging in activities that compete with your business (non-competition agreements);
• Luring your customers or other employees to a competing business (non-solicitation agreements); or
• Disclosing confidential information to anyone outside the company or anyone within the company who is not authorized to receive the information (confidentiality agreements).

Note: Non-competition, non-solicitation, and confidentiality agreements are generally governed by state law; therefore, the validity and enforceability of these contracts will vary from state to state. When drafting or seeking to enforce a non-competition, non-solicitation, or confidentiality agreement, consult a knowledgeable employment law attorney who is familiar with your state’s laws.

Drafting the Agreement

The following considerations should be kept in mind when preparing a non-competition, non-solicitation, or confidentiality agreement:

1. Determine Whether Your Company Has a Valid Need for the Agreement

Having a legitimate business reason for requiring an employee to sign a non-competition, non-solicitation, or confidentiality agreement will increase the likelihood that the agreement will be enforceable if brought before a judge. Your business reason might be to protect your trade secrets or a customer base that took time and effort to develop. The purpose of the agreement should never be to punish an employee for leaving the company.

2. Decide Which Employees Should Sign the Agreement

Requiring all employees to sign a non-competition, non-solicitation, or confidentiality agreement might seem like a good idea at first, but a judge might find that some or all of these agreements are unenforceable because they are overreaching or unnecessarily broad. Take time to consider carefully which employees should sign which type of agreement, such as those:

• In whom you have invested a substantial amount of time and resources to train;
• Who work with privileged information as part of their job; or
• Who hold high-level positions within the company, such as managers and key employees.

If all of your employees will be exposed to proprietary information at some point during their tenure at the company, it may be advisable to have them all sign a confidentiality agreement, reserving non-competition and non-solicitation agreements for those employees who routinely work with and have regular exposure to such information.

3. Provide a Benefit to the Employee

In order to be valid, a non-competition, non-solicitation, or confidentiality agreement generally must be supported by “consideration.” This is a legal contract term, which here means that the employee must receive some type of benefit in exchange for his or her promise not to disclose proprietary information or compete against your company. Making a job offer contingent on signing the agreement may be adequate consideration with respect to a new employee since the employee is receiving a benefit (the job) in exchange for the promise. For an existing employee, offering a promotion or raise in exchange for the promise may be adequate consideration in some states.

4. Keep the Agreement Reasonable

Non-competition, non-solicitation, and confidentiality agreements generally must also be reasonable. Whether an agreement is reasonable will depend on a number of factors, including the nature of the information or interests sought to be protected by the employer, the burden on the employee, the nature of the industry, state law and other factors.

Some of the key terms to evaluate in determining whether an agreement is reasonable may include:

• Duration. If the restriction remains in effect for many years or indefinitely, the agreement is more likely to be unenforceable.
• Geographic Area. Discuss with counsel whether the restrictions in your agreement should be limited to a specific geographic area and, if so, what those limitations should be. The reasonableness of the geographic area may vary based on state law, industry, and other factors.
• Restriction on Types of Business a Former Employee Can Engage In. Remember that the contract should not be so broad as to prevent an individual from reasonably making a living.

5. Explain the Consequences for Breaching the Agreement

A well-drafted non-competition, non-solicitation, or confidentiality agreement should specify the consequences of violating the agreement, which might include:

• For current employees, immediate discharge.
• For current or former employees, “equitable relief,” which would entitle the company to request that a judge prohibit the individual from continuing to engage in the conduct that caused the breach.
• Payment by the current or former employee of a monetary penalty and legal fees and other litigation costs incurred by the company.

It is essential that you consult employment law counsel to ensure that the consequences included in your agreement are enforceable in your state.

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Source: “Non-Competition, Non-Solicitation, and Confidentiality Agreements” by Zywave