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Creating an Enforceable Noncompete Agreement

A noncompete agreement can help an employer from losing trade secrets, employees and other valuable assets to competitors. With the increasing job mobility in today's workforce, it is no wonder that employers are becoming more concerned with training employees and their trade secrets. Because of this concern, companies are requiring their employees to sign noncompete agreements along with their employment contracts. These documents can, if found to be valid, prohibit a former employee from working for a direct competitor for a fixed period of time after leaving the company.

Noncompete Agreements Protect Your Business

Noncompete agreements are contracts that are entered into by employees when they start their employment with a company. These documents can help you retain your employees while simultaneously protecting your sensitive business information and trade secrets. If your employees regularly use your business's trade secrets, you would obviously want to prevent this employee from bringing this information to a competitor if the employee leaves your company.

Trade secrets are generally defined as something that gives your company an advantage over the competition because the information is not known to the public and cannot be readily ascertained by others that could benefit from the information. In addition, you need to take reasonable steps to ensure the secrecy of your trade secret. Well known trade secrets include the Coca-Cola formula and the Kentucky Fried Chicken blend of herbs and spices.

If an employee that had access to trade secrets leaves your company, either through voluntary departure or termination, he carries the knowledge of the trade secret with him. Because we cannot actually wipe an former employee's mind when he leaves the company, we have noncompete agreements instead. These documents can prevent former employees from bringing your trade secrets to your competition.

Noncompete Agreements in California

California is one state that has decided to stop employers from using noncompete agreements. This is because California saw what an open marketplace can do for innovation and the speed of business development. Silicon Valley saw one of the fastest growing industries in history, and many scholars have attributed this speed to the absence of noncompete agreements.

Since California invalidates almost all noncompete agreements, a California judge will likely deny any request to enforce a noncompete agreement. California places a high degree of emphasis on employee mobility and employers are left using alternative devices to protect their trade secrets and business information. Employers in California must use other techniques, such as nondisclosure agreements, to attempt to prevent the dissemination of their business information.

What You Will Need to Do To Make Sure Your Noncompete Agreement Passes Muster

The best advice to get when drafting a noncompete agreement is to use common sense when writing the terms. The law places a high value on a person's right to choose how he earns a living and will be very skeptical of any document that prohibits an employee from choosing alternative employment.

 1. Good Business Reasons

First and foremost, you have to make sure that you have a good business reasons to make your employees sign a noncompete agreement. Employment law frowns on noncompete agreements that simply punish employees who leave a company. In most situations, noncompete agreements are in place to protect trade secrets and other vital, confidential business information.

In addition, a little selectivity in choosing which of your employees signs a noncompete agreement will also boost your chances of having a noncompete agreement upheld. If only certain employees have access to your trade secrets, then only make those employees sign noncompete agreements.

 2. What's in it for the Employee?

One of the basics of contract law is that there must be some benefit to both sides of a contract in order for the contract to be valid. In the case of a noncompete agreement, normally the benefit for the employee is a job offer. In this situation, the employee gets a job offer in exchange for signing the noncompete agreement. However, the situation gets more difficult when you want a pre-existing employee to sign a noncompete agreement. There, the employee must receive something in addition to his job in order to be held to the noncompete agreement. Generally, employers normally offer a pay raise or a promotion in exchange for signing the agreement.

 3. Be Reasonable

It is a generally followed rule that, for a noncompete agreement to be valid and enforceable, it must be reasonable. This means that the agreement cannot extend its bounds too far in terms of the:

  • length of time the agreement will run for after employment ends
  • geographic area that the former employee is prohibited from working in, or
  • types of businesses that the former employee is prevented from working in.

Courts generally will focus on how long the agreement is set to run for after employment ends. Although there is no set rule, courts generally like to see agreements that run for six months to two years after employment ends. Any longer than this, courts may rule that the noncompete agreement is unreasonable and invalid.

In addition, if a noncompete agreement covers too great of a geographic area, or if the agreement prevents a former employee from working in an unrelated field, then the agreement may be voided. For example, if a noncompete agreement barred a former employee from working west of the Mississippi River, a court will look at this more closely. In addition, if a former paper company employee is prohibited from working for a coal mining company, a court may find this invalidates the entire agreement.

How to Make a Noncompete Agreement

There are a few questions that you should seriously consider when drafting a noncompete agreement.

First, think about your goals carefully and decide which employees need to sign such an agreement. Have you trained certain employees so much in your trade secrets that losing them would be a severe blow to your company? Is the information contained in a single source, or do multiple employees have to come together in order to fully utilize your trade secrets? Be sure that you have valid reasons for asking specific employees to sign noncompete agreements.

Second, be sure not to overreach in your noncompete agreement. If the agreement you draft is too harsh for you employees, a court may strike it down, leaving your former employee to roam the market freely looking for employment. Ask yourself how fast technology in your field is advancing. If it is on a fast pace, how long will your trade secret be viable? 3 months? 1 year? Plan accordingly in drafting your noncompete agreement.

Lastly, think about the market you are in. If your business only sells locally, then you would have a hard time prohibiting a former employee from working for an out of state company. Be sure as well that the noncompete agreement only prohibits a former employee from working in the same industry, or a very closely related one. If the agreement prohibits a former employee from working "any job in the state of Texas for two years after employment is terminated," then this would likely be held invalid.

To sum it all up, be reasonable when drafting a noncompete agreement. Courts will likely favor employees in most situations, as a company may be able to handle a financial blow better thanan employee would. Restriction on noncompete agreements are designed to protect employees from vindictive employers, and courts tend to keep that in mind when hearing these disputes.

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