In today’s high-tech, competitive market, businesses depend upon proprietary strategies, intellectual property and key employees to maintain a competitive edge. While the free exchange of ideas and information between employer and employee may be necessary for a company’s success, when valuable employees leave to join the competition, there is a significant risk that they will take business, confidential information and other employees along with them when they go. How can you prevent this from happening and protect your company’s most valuable assets? Noncompetition agreements (or covenants not to compete contained within employment agreements), if drafted and implemented properly, can effectively limit a former employee’s ability to unfairly compete by working for competitors or by soliciting company customers or employees. In addition, noncompetes often include prohibitions against the disclosure of confidential business information.
Although such covenants and agreements are widely utilized, many employers have misconceptions about the enforceability of noncompetes. Faced with an action to enforce a noncompete, courts will generally attempt to balance the employer’s legitimate interest in protecting its proprietary information, against the public’s interest in fair competition and the employee’s right to use his or her general knowledge and skills in the marketplace. A court will not likely enforce a noncompete that deprives an employee of his livelihood without sufficient consideration and justification.
What Makes an Agreement Enforceable?
While every case is different, employers should consider some important guidelines when preparing and maintaining noncompetes. The enforceability of a particular agreement will depend upon its scope, the conduct of the parties, and the importance of the competing interests at stake. In order to maximize the likelihood that a noncompete will be enforced, the agreement needs to be narrowly tailored to protect the company’s “legitimate business interests”, such as trade secrets, confidential information, or good will (including an employer’s reputation and relationship with its customers). If a noncompete is so broadly drafted that it merely serves to limit ordinary competition, it will not be upheld.
Courts generally will not enforce (or will modify) a noncompete that is unreasonable in duration, geographic location or the restrictions placed upon the former employee’s future employment. As a general rule, the shorter the noncompete period (e.g., a year or less) and the more limited the geographic scope (e.g., covering a certain region rather than worldwide), the more likely it is that a court will enforce the noncompete. In addition, a noncompete should be adequately drafted to prohibit the employee from taking an equivalent position with a direct competitor, but should not be so broad that it effectively prohibits the employee from gainful employment. Moreover, what is reasonable can vary widely by industry and position. While a 24-month noncompete may be reasonable for a high level executive in a Fortune 500 retail company, it may be considered unreasonable for a nonmanagement technician in the IT industry.
Noncompetes must also be supported by adequate “consideration” (or an exchange of promises) and should be obtained at the outset of employment or before the employee has access to sensitive business information. Courts differ on whether the promise of future at-will employment is enough to create an enforceable noncompete. Offering an employee additional consideration beyond at-will employment in exchange for a noncompete, especially if he or she has been employed for some time before the noncompete is executed, may ensure enforceability of the agreement. Such consideration can include a cash bonus, stock options, employment for a set term, or other benefit beyond at-will employment.
In addition, businesses must carefully craft noncompetes so that the employee’s obligation to keep particular information confidential is clear. However, identifying all information provided to the employee as confidential does not make it so; generally known or publicly available information does not qualify as a trade secret and will not be protected from disclosure by a court. In addition, an employer must take adequate measures to ensure the secrecy of the information. This could include implementing security protocols for sensitive electronic data, marking documents “confidential”, limiting information distribution to employees on a “need to know” basis, and periodically reminding employees of their non-disclosure obligations, including when they leave the company.
As crucial as it is to draft a solid noncompete, it is equally important that they are consistently maintained. If an employee changes positions within the company, particularly where the new position represents a change in responsibilities or access to confidential information, employers should consider executing a revised noncompete appropriate for the new position. Otherwise, a court might be unwilling to enforce the agreement later, especially when the employee has not had access to confidential information or business strategies for an extended period of time.
How Do You Enforce A Noncompete?
Legal or other action to enforce a noncompete against a former employee should not be undertaken lightly. It is not enough to assume that an employee has engaged in unfair competition in violation of a noncompete simply because the employee took a job with a competitor. Employers should have solid evidence of a violation before action is initiated, and the means of enforcement must not tortiously interfere with the rights of third parties. A 2006 decision by the trial court in Massachusetts is illustrative. In Brooks Automation, Inc. v. Blueshift Technologies, Inc., Brooks sued its former employee and his new company, Blueshift, claiming that the employee stole trade secrets and violated the terms of his noncompete agreement. Immediately after filing suit, Brooks notified the client with whom both Brooks and Blueshift were negotiating, about the dispute. As a result, the client backed out of its negotiations with Blueshift. In turn, Blueshift filed a counterclaim against Brooks for wrongful interference with contractual relations and unfair and deceptive trade practices, claiming that Brooks had filed suit in order to sink Blueshift’s deal with the client. At trial, Brooks was unable to prove that its trade secrets were stolen or that there had been any violation of the noncompete by the employee or Blueshift. Consequently, the court held that Brooks lacked a legal basis for the suit, found Brooks liable for unfair competition and ordered Brooks, the former employer, to pay Blueshift multiple damages and attorneys’ fees.
Successfully enforcing noncompetes is challenging and fraught with potential missteps. However, if you follow a few guiding principles, your company will have a greater likelihood of protecting its valuable assets without creating other potential liabilities:
- Identify a specific list of the company’s assets that require protection and take reasonable measures to keep those assets confidential;
- Identify employees who should be covered by noncompetes and narrowly tailor them to protect only the company’s legitimate business interests;
- Establish a process to review, revise and renew noncompetes as necessary; and
- Thoroughly research the merits of your claim before bringing suit or taking other action to enforce a noncompete, and consider whether the means of enforcement could create potential liability for the company.