Non-Compete Agreements… 3 Tips

(The following suggestions do not constitute legal advice. To fully protect your rights and the rights of your business, always consult a licensed attorney in your state.)

What is a non-compete agreement?

A non-compete agreement, often referred to as a “covenant not to compete,” is a legal document (or a clause within a legal document) that prevents employees from engaging in business activities that conflict with their employers’ interests for a specified time period post-employment.

Non-compete agreements are designed to give employers assurance that former employees will not reveal trade secrets, innovations or business strategies to competitors upon termination.

3 tips for writing an effective Non-Compete Agreement:

Tip #1: Make sure your agreement is “enforceable” by keeping it “reasonable.”

One of the most common mistakes that businesses make when writing non-compete agreements is designing covenants that are too restrictive. Because our justice system is grounded in the actions of “reasonable” actors, any demands which are perceived as unreasonable will be rendered unenforceable by a court.

“Reasonable” covenants satisfy three basic requirements:

• “The employer proves that it has a legitimate business interest to protect by restricting its employees’ right to compete against it;
• The restriction on the employee’s right to compete is no greater than that necessary to protect the employer’s business interest;
• The covenant not to compete is supported by consideration, meaning that the employee received something in exchange for it.” [1]

On these grounds, a non-compete agreement that demands a former employee completely recuse herself from any business activity even remotely related to her area of expertise for a period of ten years post-employment would most likely be rendered unenforceable. There is just no legitimate business interest or compensation package which could justify such a broad, sweeping covenant.

Conversely, a non-compete agreement that only demands a key employee abstain from marketing activities related to a new product launch for one year post-employment would likely be upheld. The fact that a new product launch can be closely tied to the success of a business, combined with the benefits of a traditional severance package, makes this a very reasonable request.

Tip #2: Remember your state of play.

When drafting a non-compete agreement, it is important to remember the state in which your company is incorporated. Your non-compete agreement will be bound by the laws of your state, and certain states (such as OH and AZ) have very particular limitations on the types of employment and time-period restrictions included in non-compete agreements. The easiest way to immediately nullify your agreement is to include provisions which violate state law, so make sure your covenant not to compete is written in full compliance!

Tip #3: The earlier the better.

If a non-compete agreement is presented to a new employee or consultant at the onset of a professional relationship, it becomes a simple prerequisite of doing business. It will therefore not be viewed as coercive, and the “consideration” (see above) required by the courts in the event of a dispute can be satisfied by the employment contract itself.

However, if an employee is already resigning, your business will have very little leverage when it comes to administering such a contract. Your business might be forced to make significant concessions (in the form of a better severance package, for example) in order to convince an employee to waive his/her right to do business with a competitor.[2]

 

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This article was researched and written by Nicholas Kypriotakis,
a student at Harvard Law School and guest contributor to the Lysis 360BizDev Blog.

Lysis International, is a Tampa based Sales and Management consulting firm,
specializing in B2B Sales, Management and Leadership.

www.SalesAndManagement.com
813-792-8500

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