The Artfully Worded Contract:
Use a LawyerThe Independent Quarterly, Feb. 15, 1998
Going to court is the last thing a business owner wants to do. Having a legally enforceable document signed by your sales personnel is probably the best way to prevent them from competing—and to avoid a visit to the judge in the process.
"Gentlemen's agreements and informal arrangements won't work," said one distributor member, who last year went to court over a noncompete dispute with two sales representatives.
That member eventually won—but only after an appeal to the State Supreme Court overturned a lower court decision. The problem was the wording of the contract, which was drawn up without consulting an attorney. The local court thought it was "unartfully worded," thanks to a poor definition of "our customers."
"The cost of hiring a lawyer to draw up a sales agreement in accordance with the laws of your state is well worth it," concluded the member, who has replaced the old agreement with a 16-page legal document.
Despite that, it seems that relatively few DMIA members use a noncompete covenant in the contracts they sign with salespeople. A 1987 survey showed only 51 percent of the respondents had their sales representatives sign a noncompete sales agreement. A survey in the January 25, 1988 Independent Management Report showed a somewhat higher rate of 70 percent. Still, many owners are worried about the enforceability of such contracts.
Noncompete covenants are enforceable in most states. California, Montana, Oklahoma and North Dakota are the exceptions, according to the National Institute of Business Management (NIBM). Whatever your situation, it's worth reiterating that you should consult a lawyer in drafting any agreements.
One well-publicized court case centering on a noncompete clause occurred in 1985. It involved two sales representatives from Moore Business Forms who violated their contracts when they joined a competitor. The New York State Supreme Court rejected the defendants' claims that the information they gave their new employer became stale shortly after they left their jobs; the noncompete covenant in the contract was upheld. The pertinent sections from the contract are reprinted in the box below.
SALES REPRESENTATIVE'S EMPLOYMENT AGREEMENT
"...You realize that your relationship with established and potential customers and access to confidential business information will make your position with the Company one of high trust and confidence. In view of the foregoing:
Your employment—The Company hereby employs you as a sales representative, and you hereby agree to accept such employment upon the terms and conditions hereinafter set forth.
Your Covenants—You agree that for the period of two years following the termination or cessation of your employment (for whatever reason or no reason and whether such termination or cessation occurs at your instance or at the instance of the Company), you will not, without the prior written consent of the Company, directly or indirectly on your own behalf, or on behalf of anyone else, engage in any of the following activities with respect to any product or service sold by the Company during your employment by the Company or any product or service similar to, competitive with, or intended to compete with any such product or service: Solicit, sell or contract, with a view to selling any such product or service, any person, firm, or corporation from whom you solicited any order or to whom you sold any product or service or otherwise dealt with on behalf of the Company at any time during the one year proceeding termination or cessation of your employment with the Company.
You will treat as confidential any information obtained by you concerning the customers of the Company or its business, products, techniques, methods, systems, pricebooks, plans, or policies; and you will not during your employment or at any time thereafter disclose such information in whole or in part to any person, firm or corporation for any reason or purpose whatsoever, or use such information in any way or in any capacity other than as an employee of the Company in furtherance of its interests. Upon their termination or cessation of your employment, or sooner if so required by the Company, you will forthwith deliver to the Company any and all literature, documents, data, information, order forms, price lists, memoranda, correspondence, customer and prospective customer lists, customers' orders, records and cards acquired, compiled or coming to your knowledge or custody in connection with your activities as such employee and all machines, parts, equipment and other materials received by you from the Company in connection with such activities..."
The New York State Supreme Court upheld this noncompete clause in Moore Business Forms vs. DeAngelis in 1985.