Non-Compete Agreements: How Strict Can They Be and How Can You Enforce Them
Fairness, consideration provided, and the scope of an agreement all affect potential enforceability
Nearly every company has trade secrets, confidential financial information, and other private data that a competitor could use to undermine the company’s ability to successfully conduct its business operations. So, it’s only natural that many companies seek to limit their employees’ ability to do harm by asking (or making) new and current employees sign non-compete agreements.
But the law around corporate non-compete agreements is complex – and if a business doesn’t take the right legal precautions, they could easily do themselves more harm than good.
So, what exactly does a company need to do to protect its secrets while complying with the law? Let’s take a look.
Consideration is essential for courts to see a non-compete as fair
The concept of consideration is as old as the concept of law itself; it simply means that when signing a legally-enforceable agreement, each party has to bring something of value to the table. Therefore, if you ask a newly-hired employee to sign a non-compete agreement as a condition of getting officially hired, you are offering them a job, and they are offering you a guarantee that they will not violate the terms of the agreement, protecting your business.
The problem with consideration often occurs when a company asks employees that have been at a firm for months or years to sign a non-compete agreement. While it’s true that you could threaten to fire an employee if they don’t sign the agreement (and many companies do) simply offering continued employment as consideration is not always held up by the courts. To create a fully-enforceable non-compete agreement, you can offer something of value to the employee – such as a bonus, a raise, extra employee benefits, or even a guarantee of a severance agreement if the employee is fired.
Courts often look at non-competes with suspicion, so their scope must be limited
Because corporations often have far more power than their individual employees, courts are naturally suspicious of non-compete agreements. Their reasoning goes like this: If an employee is fired or quits and finds a new job with a competitor, they may be doing similar work and using many of the same skills, but that doesn’t mean that they’re using confidential information that could significantly impede their old employer’s ability to successfully do business.
Therefore, to show the court your fairness and good-will as an employer, you’ll need to make your non-compete agreement very specific. You should ask yourself the following questions before asking one or more employees to sign a non-compete:
- What particular type of work or information is an employee not able to do for a competitor?
- Are you sure that the work methods or specific information you want the employee to keep secret are not available to the public or competitors already?
- Why will this particular work or information specifically affect your firm’s ability to do business successfully?
Asking yourself these questions is essential, because if the scope of your non-compete agreement is too broad, or includes information and processes that are already available to the public or your competitors, you’re simply hurting your ex-employees and not actually protecting vital trade secrets – at least in the view of many courts.
The length of non-compete agreements is also an essential factor in enforceability
While companies might wish they could force all their employees to never work for a competitor, that just isn’t possible. In fact, the length of non-compete agreements that a court will actually enforce is relatively short; most non-compete agreements should only attempt to restrict a former employee for doing specific type of work for a competitor or attempting to solicit your current clients for between 6 months to 1 year, depending on the specific industry your company is in.
Despite these relatively short agreements, it’s still reasonable for you to ask that employees not reveal confidential or proprietary information about your firm for the rest of their life – but that doesn’t stop them from using many of their skills and expertise to work for a competitor beyond the 6-12 month scope of the agreement.
Geographic limitations also play a role in enforceability of non-competes
In addition to making sure that the scope and length of your non-compete agreement is reasonable, and that proper consideration has been offered to your employees, you’ll also need to make sure that the geographic limitations of your non-compete are somewhat fair. With the exception of some of the largest international corporations, most medium-sized and even large firms operate in a specific region, country, or geographical area. So, unless your company is on the Fortune 500 list or has a truly international scope, you should consider limiting the geographical scope of your non-compete to the region in which your firm does business.
Of course, you can still ask employees to not reveal trade secrets to competitors, regardless of their geographic location. But if unless you’re in a very specific or technical industry, you’re not likely to have trade secrets that could potentially hurt you if revealed to companies in faraway locations, so this shouldn’t be too much of a concern for most employers.
Don’t hand a non-compete agreement to every employee
Unless the type of work you do is incredibly confidential, you should avoid asking most employees to sign a non-compete. Instead, attempt to find the employees that could seriously damage your firm’s ability to compete with competitors, and from that pool of individuals, determine which you’d like to sign the agreement.
If every employee, including entry-level employees and those who have nothing to do with confidential operations (i.e. maintenance workers) are asked to sign an agreement, many courts will see this as evidence that your firm is simply trying to restrict the rights of its employees instead of reasonably protecting itself from potential economic harm.
What to do if one of your ex-employees signs a non-compete and later breaches it while working for a competitor
When it comes to enforcing non-competes, companies should pick their battles. Unless they followed all proper legal guidelines (i.e. consideration, scope, and geographic limitations) when asking an employee to sign an agreement, and have significant evidence that an employee harmed them by violating it, enforcing a non-compete in court can be more effort than it’s worth.
However, if you decide to enforce a non-compete, your company needs to act quickly and decisively. First, gather evidence and consult an attorney as quickly as possible. Then, consider your options. In most situations, the next step is to send a detailed cease and desist letter to the ex-employee. If they do not respond or do not agree to cease breaching the agreement, you may want to send a cease and desist letter to their new employer. However, you need to be careful in doing this, because without solid proof of a breach of contract, the ex-employee could attempt to sue you for defamation.
After that, you may want to work with your attorney to petition the court for a restraining order; if you can’t get your ex-employee and his or her new employer to stop voluntarily, a court order might provide the right encouragement.
Depending on the status of the situation after you attempt to get a restraining order, you may either want to 1) attempt to settle out-of-court with the ex-employee and/or his or her new employer 2) take your ex-employee to court 3) drop the situation and stop legal action.
In many cases, you’ll want to try to settle, as legal cases may be costly and you may have less guarantee of winning any compensation for the damages the breach of contract has caused you. However, if a court refuses to issue a restraining order, and it seems like your evidence of a breach may be flimsier than you thought, it may save you time and money not to pursue further action.
Don’t forget to add a clause about attorney’s fees in your non-compete agreement
To make sure to protect your assets if you take action against former employees, it’s important to add a clause specifying that ex-employees are responsible for your legal costs if you win a court judgement or settlement against them. This can help your company save serious money, especially if the breach is a serious one.
Non-compete agreements are useful, but you need to be careful and selective about employing them if you want them to actually work
Remember, while non-compete agreements can be useful, it’s important to employ them smartly and selectively if you want them to be enforceable. Limit the number of employees who are asked to sign one, provide something in return for existing employees, and make sure the time limit, scope, and geographic limitations of the agreement are fair and reasonable – and designed to actually protect your company, not just to punish an ex-employee for using his experience to help your competitors.
To learn more about non-compete agreements and other ways to protect your business’s trade secrets and other competitive advantages, contact Padulo Bennardo Levine LLP today at 561.544.8900 or through our online form for a free consultation. As one of the few firms with four separate board certifications and attorneys who cover the practice areas of business litigation and transactions, estate planning and probate, franchise litigation, labor and employment law, real estate law, and more, we provide a truly comprehensive legal strategy.