Back in the 1970s the group Chicago had a hit with the song “If you leave me now.” The first line is “If you leave me now, you’ll take away the biggest part of me.” While Chicago was most likely referring to a romantic relationship, they could also have been referring to a business relationship. No business owner wants to hire someone, train them, then, after they become valuable, have them leave and either join a competitor or start a competing business.
Is there anything an employer can do to protect themselves? The answer is yes if it is done right (and is allowed in your state). It is called a covenant not to compete and the employee agrees that it will not compete against his or her former employer. To make it enforceable, the employer has to do it the right way.
Some states, such as California, do not allow them. So, this applies only to those states where they are permitted. As with everything else law-related, if this is something you are interested in, make sure to speak with your attorney.
Once you determine your state allows for non-compete agreements and you want to prepare one, keep in mind that there is no “one size fits all.” It has to be done the right way. As will be seen, this is a very business and industry-specific inquiry.
What is the right way? First, it has to be in writing and signed by the employee. Second, the agreement not to compete must be something that the employee agrees to at the time of employment. In other words, it has to be part of the employment contract. If it happens later, the only way it will be valid is if the employer provides something of value to the employee, since the employee, by agreeing not to compete, is giving up something of value. This is called consideration.
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Third, the agreement must be reasonable in terms of time and geographic scope. Understand that when a court is looking at this, it is looking at both sides. It is looking at the employee’s right to make a living and the employer’s business interest. There is no set time as to what is reasonable. A good rule of thumb is one year, maybe two.
The geographic scope issue has become far more complicated over the years. It used to be that a business had a fairly defined territory (such as the state of Texas or the East Coast). The days of the internet and globalization have made it far more complicated. Almost any company can do business anywhere in the country, or even anywhere in the world. Does that mean that a global restriction is reasonable? Not necessarily. Again, it depends on many factors.
Fourth, the company should be protecting a specific business interest, such as trade secrets, customer lists, or other confidential information. The employee has to have the right to make a living. So, if the company is not protecting anything of value and is doing it simply because “it can,” there is a good likelihood that a court will not enforce it.
What generally happens is, the employee signs the non-compete agreement, quits, then starts competing against the former employer. The former employer learns of this and writes a letter to the former employee. If the employee continues to compete, the former employer will file a lawsuit, seeking an injunction to cause the former employee to immediately stop competing.
Since the former employer filed the lawsuit, they have the burden of showing the existence of the agreement and that it was valid. Once that is done, the burden shifts to the former employee to show that the specific terms are overbroad, overlong, or otherwise unreasonable.
The Court needs to weigh two very real interests—that of the company to protect its legitimate business interest and the right of the employee to work and make a living.
There is a phrase called “blue pencil” that, while probably not truly used for decades, is a good indication of what courts do. Back in the day, a court would take a non-competition agreement and, if some of the terms were overbroad, take a “blue pencil” and make it so the interests of both parties are protected.
This is a very broad overview of how an employer can protect itself and its important business information from an employee who might leave the company and use it to his or her advantage. If this is something that may be beneficial to your business, speak with your attorney, and have them draft it. If you do it yourself, it may not be worth the paper it is printed on.