Non-Competition, Confidentiality and Non-Solicitation Agreements
We frequently run into issues and questions about the various kinds of agreements used by
companies to protect their interest in the event an employee leaves their employ. Sometimes it
involves our clients wanting new hires to agree to an agreement; more often, it involves working
with a candidate who already has one with the current employer and understanding its impact
on recruiting that individual.
We recently attended a seminar on these agreements presented by our law firm and thought it
would be helpful and interesting to summarize some of the things we reviewed and learned.
Before doing so, we need to stress that we are not lawyers and you should definitely consult with
qualified legal advisors before actually implementing any of these kinds of agreement.
General Thoughts
The presenters made it very clear that these types of agreements continue to be often confusing
and unenforceable unless properly executed. They made three points worthy of note in this
regard.
1.
2.
3.
There is a general dislike for restrictive agreement among judges because they tend to
reduce competition and restrict an individual’s ability to earn a living. To be enforceable,
agreements must be narrowly tailored to protect legitimate interests of the company. For
instance, the company may well be required to show that it really treats the restricted
information as confidential in the normal course of operation. Or that their business will
actually be harmed if the selling restrictions are not enforced.
The enforcement of these kinds of agreements varies dramatically from state to state. It is
very important to choose a state that provides for enforcement. For instance, all types of
these agreements are void in both North Dakota and California. Other states may have
enforcement requirements that are very specific and will void an entire agreement over a
small detail.
Finally, a company’s protectable interests will vary from employee to employee.
Restrictive agreements must be specific to the actual circumstances of the employee. This
means that any employment agreement must reflect the potential harm to the employer
that is actually a part of the employee’s role. One size does not fit all in this case.
Creating an Enforceable Agreement
The review of a number of key considerations included items that I think most of us already
know, but to list them quickly:
1.
2.
3.
4.
The agreement should be specific and as narrowly defined as possible. It must balance
the legitimate interests of the company with the employee’s ability to earn a living.
The agreement must include a definite time period. Unless there is a very specific
reason, these agreements are normally limited to 12 months.
The geography covered must be specific and closely resemble where the current business
actually is.
Judges have wide latitude in enforcing these agreements and often ask if the agreement is
written as narrowly as possible.
But other points made were less well known:
1.
You must be able to point to a defensible reason for the requirements of the agreement.
2.
3.
4.
5.
As mentioned above, make sure the agreement is written in a state that will actually
enforce it.
Deal with the issue of assignment, i.e. address the issue of what happens if the company
is bought or sold. This is apparently a rather hot topic currently in legal circles.
Be very careful to introduce this topic at the start of an employment conversation and
document each step. Specifically, advise the candidate in the initial interview that an
agreement will be required; include a notice on any application form; enclose the actual
agreement with the offer letter, and very importantly, obtain the signed agreement before
the first day of employment.
Finally, be consistent in using these agreements and be able to demonstrate that you have
been consistent.
What to do if the employee leaves
When an employee leaves be sure to have a consistent approach to dealing with a departing
employee:
1.
2.
3.
4.
5.
Remind the employee of the agreement during the exit interview, give him or her a copy
of the agreement and get a signed acknowledgement in return. Then communicate with
your customers, vendors and employees.
After the employee has left monitor customer relationships and unexpected departures.
Also conduct a complete inventory, including e-mail records.
Continue to communicate with your customers to show that you want to protect the
relationship.
Be careful to not fall into a selective enforcement situation. That could easily lead to a
judge deciding against the company in court.
There are lots of other issues regarding restrictive agreements including what to do if an
employee violates an agreement and things an employer can do to reduce exposure to liability
when hiring employees, especially when they do not alert you to an agreement that they have
signed. Again, these are issues that should be discussed with qualified legal advisors. However,
it is helpful to be aware of the main issues and some of the things that can or should be done to
reduce risk and protect company interests.