Non-compete agreements in the United States are making a comeback, and they are no longer just for top executives or salespeople. In today’s economy, non-competes are quickly spreading to blue collar workers – representing a market-wide shift in which employers assert ownership over an employee’s work experience. In fact, a recent national survey indicates that one in five U.S. employees is subject to a non-compete.
A non-compete is just one of several types of employment-related restrictive covenants. Non-competes may not be for everyone, but I believe employers should use some form of restrictive covenants in all employment agreements – the mere presence of which can dissuade employees from bad acts. The covenant appropriate for a C-level executive or top salesperson differ from those for other employees; in fact, all business contracts –whether among the company’s ownership or between the company and its dealers or independent contractors – should include restrictive covenants.
A knowledgeable, experienced attorney can also help you decide whether some or all of the following provisions should be included in your agreements:
Non-compete clauses provide the highest level of protection but are the most difficult to enforce. Courts are reluctant to restrict a former employee’s ability to find work to support their family – even if it is with your competitor. The duration and geographic scope of a non-compete clause must narrowly tailored. You cannot stop a former employee from competing in geographic areas where you are not operating, and the time period covered by a non-compete must also be reasonable. Generally the shorter the duration, the more likely the clause will be enforced.
Non-solicitation clauses prohibit parties from soliciting your existing customers. Courts are more likely to enforce these provisions because they specifically protect your ongoing customer relationships – an interest the law deems to be protectable. Enforcement of non-solicitation clauses often depends on who solicited whom: did the former employee solicit the customer, or did the customer approach the employee? As a result, consider including a non-acceptance clause for added protection.
Non-disparagement clauses prohibit employees from speaking critically of their former employer and offer more specific protection than defamation laws. You also may want to include a non-interference clause, which, if enforced, prohibits a party from hiring your employees or doing work with your providers.
Non-disclosure agreements prohibit the disclosure of trade secrets, including confidential customer lists; however, keeping information confidential can be tricky. The information must not only be secret and provide a competitive advantage, but you also must take reasonable steps to protect it from disclosure – even within your office.
Make sure the agreement also permits you to show the agreement to third-parties like a new employer, a new partner or a provider or goods or services so that you can enforce the agreement. If a third party is on notice of the restriction, continued participation in the violation of the restrictive covenant could impose liability on the third party – important leverage in resolving these sorts of cases.
Litigation to enforce restrictive covenants may be more costly than other lawsuits. Generally you must seek an immediate injunction to stop former employees and their new employers from violating the restrictive covenants. Injunctions are extraordinary measures, and lawsuits seeking them must be filed immediately and are generally prosecuted on a fast track. Hearings are scheduled, depositions need to be taken, court papers filed, and documents exchanged and reviewed – all within a very short period of time. It is like cramming a year’s worth of litigation into a few weeks.
Drafting restrictive covenants is not a do-it-yourself project. One size does not fit all. Courts don’t like these restrictions and often look for reasons to avoid them. Some states (California, for example) refuse to enforce such clauses. In states where restrictive covenants are enforceable, the covenants must be narrowly drafted to protect a legitimate business interest. Make sure to have these agreements drafted by an attorney who understands restrictive covenants.
Eric Pritchard is a Philadelphia lawyer who works to make the world safer for security and life safety providers. Contact him at [email protected]. This column does not constitute legal advice; contact an attorney with questions.
