Competition is the backbone of the American economy. But business owners need to consider the consequences of a consultant or key employee opening a rival company – stealing trade secrets, hiring valued staff, and luring away customers. This could pose a serious threat to your business. You wouldn’t have merely another competitor, but one with an inside edge – thanks to your proprietary information and diligent efforts.
To prevent such a scenario from happening, companies are increasingly turning to noncompete agreements. A noncompete agreement is designed to protect your company’s trade secrets, workforce, and customer base by restricting your employees’ ability to work for competitors, steal your customers, or set up competing businesses for a given period of time.
However, even well-crafted noncompete agreements can be difficult to enforce. It is up to a judge to determine if they are reasonable. Many courts look on “noncompetes” with disfavor if it appears they are principally being used to erect barriers to competition. In addition, the public policy of most states won’t allow you to completely prevent employees from changing jobs or cause them undue economic hardship.
To increase the chances of successfully enforcing a noncompete agreement, you must be able to demonstrate that it is necessary to protect your trade secrets or legitimate business interests. Here are some steps you can take to help make your company’s noncompete agreement more enforceable:
- Research your state laws. Some states are hostile to noncompetes and limit enforcement. If this is the case in your state, you may want to consider a less comprehensive agreement, such as a nonsolicitation agreement – which restricts an employee’s ability to lure away coworkers or clients – or a nondisclosure agreement – which prohibits employees from improperly using trade secrets.
- Customize your agreement. Avoid boilerplate “one-size-fits-all” agreements. In general, the more specific the noncompete is, the better.
- Be reasonable. The more you attempt to bar employees from all competitive activity, the more difficult the noncompete will be to enforce. It’s best to limit an agreement to one or two years, with reasonable geographic restrictions, given the industry and the employee’s responsibilities.
- Give to get. You may have to offer something in exchange to make a noncompete stick. With a new hire, it may be enough to request a noncompete as a condition of employment. But, with a veteran employee, you may need to offer something more, such as a bonus or promotion. State laws vary widely on what makes an appropriate exchange.
- Treat trade secrets with care. To convince a court that certain information is a trade secret, you must be able to demonstrate that you protect it as such. Secure confidential information in a safe place and limit access only to employees with a “need to know.” Establish written sign-out procedures. Inform employees of what information is confidential and remind them during exit interviews of their agreement.
Most companies strive to remain competitive, expending great effort on a daily basis. No noncompete can completely prevent competition. But, an enforceable agreement can at least help keep the playing field level.