February 2005
Volume 1, Number 2
Table of Contents
Non-Compete Agreements:
How To Protect Your Company from Employees “Jumping Ship”

By Michael E. Adler, Esquire

Of course, it is a reasonable protective measure for an employer to want to prevent the disclosure of the company’s trade secrets and other confidential information by their employees. It is understandable that employers do not want to invest time and money training an individual who then quits and goes to a competitor or opens a competing business. It is not just the loss of a valued employee. Having a valued employee defect to a competitor and take sensitive proprietary information such as customer lists, pricing information, marketing strategies, or product and service expertise with him or her can be a devastating blow to any business – large or small.

On the other hand, it is sensible for the entrepreneurial employee who accepts employment with the company today to avoid forever being barred from using his or her hard-earned skills in pursuing a livelihood elsewhere in the future. Thus, courts in most states undertake to balance these interests through the even-handed enforcement of reasonable non-compete agreements with employees.

A non-compete agreement is typically signed by new employees as a condition of employment either before or during the orientation period. If the employee later leaves the company, a well-written non-competition agreement prevents former employees from competing with the company, recruiting other employees, or misusing confidential information such as customer databases. Such an agreement should always be used when hiring a key employee, as defined by the parameters of your business. A non-compete agreement is particularly useful for employees who have access to critical information, either through job responsibility or through social interactions with owners or high-level executives.

Every business should consider having its key employees or sales people sign this contract as part of their employment agreement. If the employee later leaves the company, this agreement will prevent them from competing with the company. A good non-compete agreement provides the employer with protection in three key areas: 1) It prohibits a former employee from working with a competitor; 2) It prohibits a former employee from soliciting former coworkers to be employed in his or her new company; and 3) It prohibits a former employee from soliciting or disclosing confidential information, such as customer lists and data, learned in the course of their employment. Other clauses that should be considered in consultation with an attorney include provisions that provide for injunctive relief, compensatory and punitive damages and reimbursement for attorney’s fees.

Employers must understand that courts generally do not favor agreements that prevent people from working. Courts appreciate the need for non-compete agreements, but they will not tolerate agreements with unreasonable restrictions. Consider carefully the fact that an employee who signed an agreement does not guarantee that the court will enforce it. Courts understand that there is a substantial investment in hiring, training, and paying employees, and that employers need to protect their interests. Generally, however, the court will enforce a reasonable non-competition agreement, provided: 1) the employer has a legitimate need for the agreement; 2) the geographic area covered is not too broad, and 3) the duration of the agreement is not too long. These three factors may vary from state to state, industry to industry, and even from judge to judge, so it is advisable to consult with a attorney knowledgeable on these issues.

Moreover, like all other contracts, to be enforceable this agreement must be supported by consideration. Usually, this requirement is satisfied if the non-compete agreement is completed at the start of employment. If the employee is asked to sign the non-competition agreement after employment has started, a court may find the agreement unenforceable for lack of consideration. There is also a noticeable recent trend in some states to enforce a non-compete promise only if the employee made that promise in the context of a larger agreement.

Every company should consider reviewing the non-compete agreements they presently use, if any, with an attorney. Should an employee “jump ship” with the company’s trade secrets and sensitive customer information, the company should promptly contact an attorney. With a well-written, reasonable non-compete agreement, and the prompt filing of a temporary restraining order, the company can put the ex-employee -- now-competitor – out of business before the defector knows what hit him.

For more information about non-competition agreements, and how to protect your business from the defection of key employees, contact Michael E. Adler, Esq., who is an attorney with Blank Rome LLP in Philadelphia, at (215) 569-5500 or via email at adler@blankrome.com. Mr. Adler has advised many companies on the drafting of their employment agreements, and has handled litigation throughout the United States against employees who have left their employ and attempted to ignore the terms of their agreement.

 

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