By: Spiwe L. Jefferson is general counsel of ChristLight Productions Ltd., and a member of the ACC employment and labor, law department management, intellectual property, and litigation committees.
We previously discussed actions employers should take when a key employee leaves. Significant tools in the arsenal of strategies are contracts signed by the employee, but waiting until the employee departs is too late to start thinking about them. In this article, we discuss contract considerations at the beginning of the employment relationship.
It is as important for the company to protect its confidential information during an employee’s tenure as after, so be deliberate in defining the scope of confidentiality in addition to the term. In addition to requiring the protection of confidential company information, the agreement can prohibit the use of that information for anything other than the present company’s purposes. Invoke federal protections by including the whistleblower immunity provisions required by the Defend Trade Secrets Act.
While the agreement is a good start, ideally, the company should also have a document security protocol that includes properly marking and managing the disclosure and distribution of all internal documents based on their levels of confidentiality. This protocol should culminate in a defensible document retention policy with which the company can prove employees comply.
While sometimes incorporated into confidentiality or noncompete agreements, nonsolicitation provisions provide their own brand of protection different from the other two. Given the greater scrutiny applied by courts to noncompete agreements, it may be safer to incorporate nonsolicitation provisions into a confidentiality agreement.
Ideally, nonsolicitation agreements should be used judiciously, and applied to employees whose solicitation of current employees may actually be detrimental to the organization.
The more controversial but powerful tool is the noncompete agreement, which prohibits the employee from seeking employment with a competitor or in the same trade for a period of time. Courts generally dislike the restraint on trade and livelihood inherent in these agreements.
The treatment of noncompete agreements is state specific, so it is important to review applicable laws. For example, noncompete agreements are void in California, North Dakota, and Oklahoma. In the remaining states, the standards applied to these agreements can vary considerably. To survive scrutiny, examine the aspects below.
Limit temporal scope
Limit the use of noncompete agreements to job functions that actually pose a risk to the organization (e.g., research and development engineers, certain sales positions, certain senior roles). Not only does measured use increase the likelihood of enforceability, but it also reduces the risk of a court establishing negative precedent that could encourage other employees to contest the validity of their agreements. Factors to consider in identifying employees for whom a noncompete agreement is necessary include:
- Nature of the work;
- Time necessary to train new employees;
- Time necessary to allow customers to become familiar with new employees; and,
- Time necessary to obliterate the identification between the employer and the employee in the minds of the employer’s customers.
Protect legitimate interests
Have specific and articulable business interests to be protected and extend the agreement’s scope no further than is reasonably necessary to protect those interests. In Minnesota, an enforceable noncompete agreement must be both necessary to safeguard the employer’s protectable interests and reasonable as between the parties. Generally, companies have protectable interests in:
- Customer goodwill;
- Confidential information;
- Trade secrets; and,
- Customer contacts.
Know exempted professions
Only use noncompete agreements for permissible professions since some states exempt certain professions, such as doctors, lawyers, veterinarians, and in Illinois, low-wage workers.
Some states impose specific timing requirements for noncompete agreements to be enforceable. For example, New Hampshire employers must provide the noncompete agreement before or concurrent with the offer of employment. Oregon employers must provide written notice of the noncompete agreement to the employee at least two weeks before employment begins.
In some states, the offer of employment is sufficient consideration, while other states require new consideration. Maryland requires an employee to remain employed with the company for a significant time after the noncompete is signed for it to be enforceable.
In addition to post-signing longevity, South Carolina requires additional consideration, such as a raise. Consideration for existing employees can include stock grants, options, bonuses, change of control benefits, and severance benefits. There should, however, be a clear distinction in the remuneration received by employees who sign a noncompete and those who do not. Failing to create such a distinction may render the consideration illusory and the agreement unenforceable.
Limit geographic scope
Geographical limitations are also state and case-specific. A Connecticut court struck down a two-year noncompete agreement prohibiting an employee from holding a similar job within a 75-mile radius, whereas a Missouri court upheld a two-year noncompete agreement with a 100-mile radius. In gauging the potential reasonableness of a geographical limitation, consider:
- Your reasonable trade area;
- Customer location (which may be far more important than the employee’s home base);
- The area where the employee actually performs her duties; and,
- The tools of trade and communication used by the employee. Consider whether the “geographic” scope is about the physical location or the cyber and technological footprint.
Limit time periods
Some states specify allowable time periods, such as 12 months in Utah and 18 months in Oregon. While other states may not specify a time frame, a review of the case law may reveal informative patterns.
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