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Non-Compete Agreements: What Can They Accomplish?

It may seem ironic that companies encourage innovation and brilliance while employees are on the payroll, but pull the plug on that ambition if they dare to leave. But non-compete agreements attempt to do just that to control damage.

State Laws Vary

Laws regarding non-compete covenants vary from state to state. For example, courts in California reject non-compete agreements because state law makes them unenforceable except in limited circumstances. Because non-compete covenants are generally not allowed in California, employers there often use confidentiality agreements and other types of contracts to protect trade secrets and sensitive information.

Court Rulings

    A few examples illustrate how courts have looked at non-compete agreements:
    1. A vice president at an IT company was in charge of content on the firm’s Web sites. He accepted a position with a print-based publisher that was creating a competing site. The IT firm argued that the VP’s employment agreement barred him from accepting a job with the publisher for one year. But a court threw out the agreement’s time restriction, based on the speed of developments in the industry. It noted: “When measured against the IT industry in the Internet environment, a one-year hiatus from the workforce is several generations, if not an eternity.” (EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299, U.S. District Court, N.Y., 1999)
    2. The Georgia Court of Appeals threw out a non-compete provision forbidding a sales director from taking any job with a direct competitor. The restriction would have prevented the worker from assuming a completely different job with a competitor and the Court found it overly restrictive. (U.S. Firearms Training Systems, Inc. v. Sharp, A94A1351, 1994)
    3. The Harris County District Court of Texas found a non-compete agreement to be unenforceable. The agreement stipulated that the plaintiff could not work for any competitor in Texas or Louisiana for two years. According to the ruling, the plaintiff would be unable to work in any industrial capacity at all, conditions that were severe enough to prevent him from earning a living. (Cause No. 2005-74330, 61st Judicial District Court, Harris County, Texas.)

If you feel a former employee’s conduct violates a non-compete agreement, consult with your attorney about seeking a court order to stop the activity.

Whether signed when staff members come on board, or as part of a ream of paper presented as they leave, non-compete agreements have similar restrictions. An employer lays claim to any products, intellectual property and ideas developed while on the job. And clients handled while a staff member was employed by the company are also generally off-limits.

Courts have tried to balance the interests of employers and departing employees in deciding whether or not a non-compete agreement should be upheld.

In order to hold up, here are three areas in which the agreement must be reasonable:

Time. You obviously can’t restrict a former employee from competing forever. The time period considered reasonable is one to three years. Sometimes this period is shortened, depending on the industry. For instance, in high-tech businesses where information changes quickly, the restrictions are frequently shorter.

Geography. You can make restrictions in the area where your company does business, but probably not nationwide or worldwide. One exception is Internet or software companies that operate worldwide.

Scope. No non-compete agreement can strip an employee of the right to earn a living. An agreement can restrict certain core functions, but it can’t prevent an employee from using skills acquired over years. Agreements are analyzed for reasonableness by the courts.

Restrictions must normally be limited to the job the employee performed for the employer. For example, a software engineer for one automaker can’t be restricted from taking a sales job at another manufacturer’s showroom.

Non-compete agreements are subject to the laws of the state in which they’re written. Some states don’t recognize them. Others stipulate that employees must enter into the agreements when first hired. If the document is sprung on an employee later — up to and including quitting day — the company may have to offer something extra (such as a promotion, raise, stock options or other enticement) for the agreement to be valid. So the best time to secure an agreement is generally when you hire an employee.

To sum up, you can prevent staff members from competing with you after they leave your company but the exact restrictions depend on many things — most importantly, whether circumstances make it reasonable and enforceable.

Consult with your attorney for assistance in drafting agreements.