The Noncompete Covenant:
Points to Consider

The Independent Quarterly Feb. 15, 1988

Knowledge is power—particularly when someone can use the information they gained while working for you to hurt you in the marketplace. As an employer you have a right to protection from such competition. At the same time, the courts recognize the right to freedom of movement on the part of an employee.

How those conflicting interests are interpreted determine how your case against an ex-employee will hold up in today's courts. Here are a few pointers to increase your chances of a victory in case you should ever take it that far:

Written agreements are your best bet.
Any employee has a common-law duty not to divulge certain information acquired during employment. However, without a written contract it is up to the employer to prove that the "stolen" material was secret and properly protected. Also, many people are leery about breaking an agreement they know is in writing. The written word can be a powerful deterrent.

The agreement must be reasonable.
This is the key to ensuring the enforceability of the contract. The exact definition of what is reasonable is somewhat ambiguous, but any noncompete covenant certainly must include:

  1. A time limit that is realistic in light of the useful life of the information the ex-employee has. Limits of 1 to 3 years are generally enforceable; anything over 5 years will probably be considered unreasonable.

  2. Geographical limits restricted to the area in which the ex-employee worked or in which your business operates or expects to function.

  3. Allowances for the individual to have a reasonable opportunity to pursue a livelihood in his or her chosen occupation or career.

Rules vary by state—and circumstance.
Noncompete covenants are illegal in California, Montana, Oklahoma and North Dakota. In Alabama, Florida, Hawaii, Louisiana, Michigan, South Dakota and Wisconsin they are not forbidden outright but there are strict limitations on what is considered "reasonable." Keep in mind that other circumstances may affect how the courts rule as well. For example, when the job market becomes tight the courts may interpret reasonableness more conservatively, ruling that the ex-employee has few job options and may have to work for a competitor as a result.

Instate it at the time of employment.
Having a new employee sign a noncompete provision is far easier (and more enforceable) than doing it sometime in the future. Many companies have all their employees, regardless of their position, sign such a contract. Who can say that the receptionist you hire won't someday become an important salesperson for your company? The noncompete provision will apply to the employee throughout the term of employment despite any promotions he or she might receive. If you do accompany a promotion with something in writing, however, be sure to refer to the original contract.

If you want to instate one later.
Your best bet in this case is to be sure it is part of an overall upgrading of your relationship. When you give someone a promotion or significant raise, for example, include a new contract as part of the arrangement. Noncompete covenants imposed on employees during their term of employment may be ruled invalid by the courts unless they include substantive changes like a new compensation plan.

If an employee refuses to sign.
Consider electing him or her an officer. This fiduciary role places limitations on how the employee may use confidential information (see "How to Avoid Competition from Employees").

The employer has obligations, too.
Specifically, you must uphold the other agreements in the contract. Courts have ruled that a noncompete covenant may not be enforced in cases where the employer has broken other parts of the contract. This includes actions such as: firing the employee without the required two weeks' notice; subjecting the employee to a unilateral decrease in expense allowances or a reduced pay scale; or breaking a promise made to a sales rep not to put any more sales reps in that territory. As long as you keep your part of the bargain, the employee is also bound by it.

What if the employee breaks the contract?
Take several steps before going through the time-and resource-consuming process of a lawsuit. Remind the employee of his or her obligations under the contract. If the employee has gone to a competing employer, inform that company of the contract. They possibly hired the person because of what he or she knows about your business, but if they are made aware of your written contract they may be deterred. If the employee is beginning a business, the last thing they want is a court battle they will probably lose. It consumes their time and resources, too.

Be sure to use a capable lawyer.
It's worth repeating: there's simply no substitute for qualified legal assistance in drafting your agreements. This is the best way to ensure that they will meet the tests of the courts and the specific regulations of your state. You may not have to go to court, but if you ever do you'll be glad you paid the extra money to ensure your contract is enforceable under the law.

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