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When and How to Use a Non-Compete

To continually innovate and stay ahead of industry trends, most companies grant employees, suppliers and other stakeholders special access to trade secrets and other sensitive company information that they need to do their job. To ensure this information doesn’t fall into the wrong hands, companies require these second parties to sign agreements that protect the organization against risk and other unforeseen consequences resulting from leaked information.

A non-compete agreement is a contract explicitly stating that one party agrees not to compete with the other for a period of time. This document prevents employees and contractors from working with or for competitors after the business relationship is terminated. A non-compete agreement may also be referred to as a non-compete clause or a covenant not to compete.

When to Use a Non-Compete Agreement

Employees

While federal legislation protects your intellectual property (copyrights, patents and trademarks), trade secrets must be guarded by the company. The International Trade Administration defines a trade secret as a compilation, device, formula, pattern, process, program or technique of economic value that is used by companies to gain a competitive advantage. Since this definition covers a wide range of company projects and initiatives, it can be relatively easy for former employees to unknowingly reveal confidential information to their new employers.

For example, your former employee may volunteer examples of different tactics or techniques used to launch a key product at your company. This information, though seemingly casual at first glance, could be proprietary information that gives his company both valuable intelligence and a competitive advantage.

Although the prospect of a bitter employee willingly sharing corporate trade secrets is enough to make employers include a non-compete clause in every employment contract, it may not be necessary for every employee. Weigh the following considerations before deciding whether to require an employee to sign a non-compete agreement:

  • In some cases you should only include a non-compete clause when dealing with high-ranking employees or employees occupying positions that have close access to or require knowledge of company trade secrets, formulae and other techniques deemed proprietary.
  • You can only include a non-compete clause if there is a valid business reason for the agreement (otherwise, it cannot be enforced in a court of law).
  • If you have already required employees to sign an NDA, this already goes a long way to protect your intellectual property.

Partnerships

Non-compete agreements can also be used with business partners. For example, a non-compete agreement can prohibit former business partners from hiring your employees within a certain time period following the employees’ resignation or termination from your company. Likewise, a non-compete agreement can protect business records and property by requiring second parties to return them within a specified time period.

Enforceability of a Non-Compete Agreement

Employee non-compete agreements are governed by state law. For instance, employers in the State of California can only use non-compete agreements against business partners and stakeholders. Nevertheless, in the event your non-compete agreement is violated by the other party, you can take legal action if:

  • The contract is reasonable in duration, geography and scope.
  • The contract is signed after the employee begins working for your company (e.g. the employee may need to receive compensation or another item of value for the contract to be valid).
  • The contract protects a legitimate business interest, such as client lists, product ingredients, etc.

If you do business in California or another state where employee non-compete agreements are illegal, a non-disclosure agreement can be an appropriate alternative. A non-disclosure agreement establishes confidentiality and restricts third-party access to certain company knowledge and corporate materials. Consult an attorney familiar with your state’s laws when drafting your non-compete agreement or non-disclosure agreement to determine its enforceability in court.

 
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