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Here is how HR can help prevent the missteps that could cost your company big in court.
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A one-size-fits-all non-compete agreement wont pass a judges inspection.
If your business is like most, you probably rely on a few central employees: the leading salesperson who has cultivated numerous relationships with clients, the head researcher who has developed a revolutionary industrial process, or the key executive who has brought pre-eminence to the company. Should one of these central employees leave, your business quickly may lose its competitive position—especially if the former employee joins a competitor. To protect your most valuable business assets—customer relationships, pricing information and marketing strategies—you will need to develop well-drafted, narrowly tailored non-compete agreements.
And you will need to use those agreements sparingly. Limiting non-competes to employees who present a genuine competitive threat demonstrates the importance and reasonableness of any restrictions, and enhances the likelihood that the agreements will hold up in court.
Thus, it is key to carefully consider which employees have access to confidential information or processes when determining who should sign such agreements. A thoughtful, consistent approach—both to identifying which employees must sign agreements and to drafting individual agreements—provides the strongest chance for success.
But a well-tailored, narrowly focused agreement is only the beginning. To overcome many judges’ distaste for non-compete agreements and to stop former employees from damaging your business, you’ll need to take other practical steps as well.
Tailor To Fit
A written agreement that limits an individual’s future employment is enforceable only to the extent that its restrictions are no greater than necessary to protect the employer’s legitimate business interests and do not impose an undue hardship on the employee. Accordingly, a carefully drafted agreement that imposes reasonable restrictions is the key, not only to securing the employee’s voluntary compliance—which is the desired effect—but also to persuading a court to enforce an agreement as written if the employee fails to comply.
In designing a non-compete agreement, a company should consider information material to whether a non-compete agreement will fit an individual. Relevant factors include:
The scope of the company's operations and the employees duties.
If an employer decides that a non-compete is suitable, it should craft the agreement as specifically as possible to that person. In other words, avoid boilerplate, one-size-fits-all agreements. Nothing jeopardizes enforcement of an agreement more than provisions that are clearly inapplicable to the employee in question.
Design the agreement to fit the individual in a specific position by:
For example, an employer that makes special coatings for the paper industry should limit its restriction to that specific field, rather than include a general prohibition against working for a competitor. If it is easy enough to expressly denote your company’s major competitors, that too will go a long way toward convincing a court that the restrictions are narrow and reasonable and that they fit.
A Few Stitches In Place and Time
Think of geographic and time restrictions as the seams to non-compete agreements. Some states will not enforce any non-compete that does not contain geographic restrictions. A valid geographic restriction depends on the scope of the company’s business as well as the individual employee’s duties.
A national or even worldwide restriction may be valid if the company is actively engaged in business on such a wide front, but only if the employee is actually engaged in business on the same scale. Otherwise, the restriction may be unreasonable. For instance, a company may sell its product on a national basis but assign its sales representatives to particular regions. A restriction beyond the employee’s regional territory will be difficult to enforce.
As for time restrictions, courts are much more likely to enforce restrictions of one year or less. (Ohio is one exception, where restrictions of one and two years generally are considered reasonable.)
The appropriateness of a time restraint depends on factors such as how quickly an employer can employ and train a replacement, the length of time needed to adequately protect the employer’s interests, and the ex-employee’s ability to find suitable work or earn a living.
How the non-compete agreement is presented also matters—with emphasis on the word agreement. If an employer can show an employee knew what she was getting into when she entered into a non-compete agreement, it will be easier to show the fairness of the restrictions.
Consent should be obtained in exchange for employment, wages, benefits and other consideration. Allocating specific compensation in dollars, stock options or other benefits in exchange for the agreements can be particularly effective.
Reviewing, updating and re-executing non-compete agreements as part of the annual performance evaluation process not only fulfills that requirement, but also reinforces the employee’s consent to the limitations. Care must be taken, though, because some states require additional consideration for non-compete agreements that are executed after the beginning of employment. In those cases, re-execution should be restricted to instances where the performance evaluation leads to an increase in pay or benefits.
Avoid Snags in Enforcement
After properly designing and fitting non-competes and securing workers’ buy-in, employers should face fewer snags if they need to enforce the agreements.
If an employee breaches a non-compete, the usual first step is for the company, often through counsel, to remind the former employee of his or her duties in a “cease and desist” letter. Putting the new employer on notice also is effective, as the new employer often is unaware of the new employee’s restrictions. If these steps fail, they will support an argument that court intervention is the company’s only recourse to protect its rights.
If the employer’s informal attempts to secure compliance fail, the employer may pursue a number of different remedies in court, including injunctions and monetary damages such as lost profits. But monetary damage awards may be cold comfort to an employer that loses an employee, key clients, trade secrets and its competitive position to a rival. The more effective procedure for enforcing a non-compete agreement is through an injunction—a court order barring the employee from violating the agreement.
Injunctions work better than money damages because they immediately stop the employee from working for a competitor, disclosing trade secrets, or interfering with customers and clients. Many judges, however, are predisposed against granting injunctions to enforce non-competes, even when the laws of their state provide that non-competes are enforceable. Whether a judge will grant injunctive relief to enforce a non-compete ultimately may depend on his or her own sensibilities and notions of fairness.
Given that employers may face an uphill battle in receiving an injunction, they should prepare compelling evidence showing that, without the court’s protection, their legitimate business interests are in jeopardy. In many states the most persuasive business interests are the employer’s trade secrets and customer information.
Along these lines, the employer also must show that, absent an injunction, it is likely to suffer irreparable harm as a result of the former employee’s breach. The former employee’s possession of trade secrets, for example, might be enough to convince a court that irreparable harm will result from the breach of a non-compete, but often more compelling evidence is necessary, as discussed in the next section.
Common Patterns Of Bad Conduct
Evidence of the former employee’s bad conduct is perhaps the most convincing in pursuit of an injunction. “Bad conduct” can take many forms, including copying, downloading or otherwise taking from the employer any information that is proprietary or trade secret in nature. Such information includes customer lists and contacts, customer preferences, pricing information, profit margins, product formulations, business strategies and research, and any other information that can be construed as having economic value to the employer.
Other bad-conduct evidence that a judge might find persuasive includes the employee’s plotting—on the employer’s time or using the employer’s resources—toward forming a competitive business or joining or assisting a competitor.
Virtually anything done surreptitiously on the employer’s time while using the employer’s resources might suggest a threat of irreparable harm. Such conduct will indicate to the judge the former employee’s intentions were not only to engage in competitive activity, but also to do so in a manner that harms the employer or benefits the former employee at the employer’s expense.
As a preventive measure, employers should inform employees that their e-mails, voice mails and work documents are company property and can be monitored at the company’s discretion. Develop pro-cesses for capturing information that may demonstrate an employee’s disloyal use of company resources. Implementing such processes may seem cumbersome, but they go a long way in helping a business prove a case if it gets to court.
Because bad-conduct evidence can be so powerful in court, employers should do everything they can to gather and preserve it any time a key employee who is subject to a non-compete leaves the company. One of the most important things an employer can do to garner bad-conduct evidence is to recover the former employee’s computer and isolate it so that another employee does not use it, until the company is satisfied that it can trust the departing employee.
As soon as possible, take any other necessary steps to secure e-mail correspondence that the employee sent and received during the months before departing. This generally can be done by the company’s in-house IT staff.
Departing employees often try to cover their tracks by cleaning their hard drive or otherwise deleting information from the computer system. Frequently, however, computer forensic specialists can recover deleted files and e-mails, even in situations where the former employee has gone to great lengths to erase them. This process is expensive, but it may be warranted if the stakes are high enough.
A carefully drafted non-compete agreement should create a level playing field by preventing a former employee from using a company’s good will, confidential information and customer contacts to create an unfair advantage in the marketplace. Because the threat is real and the potential damage great, it is worth making the effort to create the protection provided by well-designed non-compete agreements for key employees.
In the end, however, an employer seeking to enforce a non-compete agreement must appeal to the individual judge’s sense of fairness. If an employer can highlight covert conduct by the former employee that is detrimental to its business interests, the non-compete agreement will appear in the best light, helping it to pass a judge’s inspection.
Stephen L. Richey is a partner in Thompson Hine LLPs Labor and Employment practice group in Cincinnati.
Other Restrictive Covenants
Non-compete agreements aren't the only form of restrictive covenant available to employers.
Non-disclosure agreements are another option. These agreements are intended to protect the disclosure and misuse of a company's confidential information and trade secrets. Trade secrets are proprietary information that has value because the information is generally unknown in the industry and to competitors. The description of the specific information to be protected (e.g., sales margins for the salesperson, computer-aided design drawings for the engineer and computer codes for the programmer) is a crucial detail.
As for non-solicitation agreements, it is helpful to delineate the actual customers of the employee. Some companies restrict employees from soliciting lists of clients, customers or business leads, preventing the direct theft of a long-term client by a former employee. Courts generally enforce restrictions on contacting customers only if the employee had personal, ongoing or recent contact with the customer. To remain accurate, such a list must be kept current.
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