How Effective Are Non-competition Agreements?
Originally published: 07.01.07 by Mike Coyne
Three factors determine whether and to what extent you'll be protected.
You hire thebest service technicians that you can find. You provide them with more andbetter training than any of your competitors provide to their people. Youemphasize customer relations, salesmanship, and the importance of developinggood relationships with your customers. Then, just as you are about to reap therewards of your investment in your employees, a couple of your best techniciansannounce that they are leaving to open their own shop. How could you haveprotected yourself from this outcome?
Many businessowners believe that non-competition agreements are the answer. However, whetherand to what extent a non-competition agreement can protect your businessdepends upon a number of circumstances. Here's what you need to know aboutnon-competition agreements.
• Theenforceability of non-competition agreements is a state-law matter. If you arein California,you are out of luck. In California,non-competition agreements generally are invalid, except in connection with thesale of the business. Many states, however, such as Ohio, are fairly liberal in enforcing suchagreements.
• If you arein a state in which non-competition agreements are not illegal, whether and towhat extent a court will enforce a non-competition agreement generally dependson three factors: the presence of consideration, the existence of a protectableinterest, and the reasonableness of the non-competition terms
• Therequirement of "consideration" means that an employee must receive something ofvalue in exchange for his or her promise not to compete. If an employee signs anon-competition agreement before beginning work with an employer, the promiseof the job probably is sufficient consideration for the agreement. If you askan employee to sign a non-competition agreement after employment has alreadybegun, then you may have to provide additional consideration, such as a bonusor promise of a promotion. (However, some state courts hold that continuedemployment is sufficient consideration to allow for enforcement of a noncompetition agreement.)
• The needfor a "protectable interest" means that an employer must have an interest toprotect. Generally, the courts acknowledge that an employer has a legitimateinterest in protecting its relations with its customers and in preventing aformer employee from taking advantage of relationships or information acquiredin the course of employment. There are circumstances, however, where anemployer will not be able to show a protectable interest. For example, consideran employer that has retail-sale locations located in two cities about 30 milesapart. If the employer closes its retail outlet in one of the two cities, itlikely will not be permitted to enforce a non-competition agreement in the cityin which the retail outlet was closed. This is because the employer no longerhas a protectable interest in that city.
• Perhaps themost important factor considered by courts is the "reasonableness" of therestrictions placed on the employee. As a practical matter, the courts willconsider three factors: the length of time that a restriction is in place, thegeographical area in which competition is prohibited, and the nature of theactivities that are prohibited by the non-competition agreement. In ourexperience, courts generally are unwilling to enforce non-competitionagreements that are intended to be in place for more than 12 months, unless anemployer can demonstrate that a longer term is absolutely necessary to protectits interests. Likewise, courts will enforce a geographical restriction only tothe extent that the restriction is reasonably necessary to protect theemployer. If a geographical restriction is written in a fashion that appears tobe intended to "punish" a former employee, the courts likely will throw it out.In some states, rather than completely invalidate a geographical restriction ortime restriction, the court will use its discretion to reduce the size of thegeographical restriction or duration of the agreement.
If you thinkyou need non-competition agreements to protect your business, you'll need toget some legal help and follow these guidelines:
• Draft anon-competition agreement as narrowly as possible. Make the time andgeographical restrictions the minimum necessary to protect yourself. Includelanguage that demonstrates the need for protection.
• Considerother contractual provisions that can help protect your business. For example,a non-solicitation provision that prohibits your former employees fromcontacting your customers for a specified period of time may be more effectivethan a non competition agreement in protecting your business relationships.
• Consider acontractual provision that prohibits your former employees from hiring any ofyour current employees for some period of time after termination of employment.
• Include aconfidentiality provision in your employment contracts that specificallyprohibits employees from taking customer lists and other business property upontermination of employment.
• Don'trequire all of your employees to sign non-competition agreements. Theagreements are most important for employees who have sufficient informationabout your business and sufficient skills to set up a competing business.
MichaelP. Coyne is a founding partner of the law firm, Waldheger Coyne, located inCleveland, Ohio.For more information on the firm, visit www.healthlaw.com, or call 440-835-0600.
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