Your top sales producer left the company and took a job at the competitor down the street. He’s got your client list memorized and knows your product line and pricing by heart.
A staff engineer jumped ship and left the state for another opportunity. It’s not in the same industry, but there is a potential overlap in customers.
Because of a tough financial year, you made the difficult decision to let go of several key staff members holding positions where company information was put into their trust. Now they’re gone, but what did they take with them that could affect your future success?
Non-competition agreements are critical for any business with trade secrets, specialized information that must be protected, and any business with a sales component. “Non-competition agreements, either on their own or as part of an employment contract, can help control the use, dissemination and destruction of trade secret and other confidential information,” says Mark Craig, partner, Litigation Practice Group, Brouse McDowell in Akron, Ohio.
Smart Business spoke with Craig about how to develop and enforce a non-compete agreement.
What businesses should implement a non-compete agreement?
Even information obtained by memory can be the basis for a trade secret violation. Considering that, what information could any of your employees memorize or take with them that could harm your business if they left today? Consider customer lists, manufacturing processes, special operations/systems, trade secrets, pricing, product development and industry knowledge. If you don’t have a non-compete agreement in place, you run the risk of one of your employees using company information to a competitor’s benefit if they take a job elsewhere or start their own business.
On the other hand, you may reconsider a non-compete if such an agreement would hamper the hiring process. Will a potential star employee turn down a job at your business if they’re required to sign a non-compete? Do your competitors have non-compete agreements in place? And, is the position one that entails obtaining company information that is not common knowledge? For example, if you own a local fast food franchise and expect managers to enter in a non-compete agreement that prevents them from working at any other fast-food restaurant in town, you probably won’t attract many managers for the position. So before implementing a non-compete agreement, consider the specificity of the information, and what would happen if an employee left your business and took that information along.
What are the key steps to developing a non-compete agreement?
First, identify the company information you want to protect. Then, gather a solid understanding of your market. What is your target market today, and what are your plans for expansion? It’s important to detail the geography your non-compete agreement will cover. Who is your competition, and, considering your short- and long-term business goals, how could this evolve? Also consider your existing employment agreement. How are employees compensated? Are workers ‘at-will’ employees? What information will they be exposed to while working at your company? As you develop the agreement, research competitors’ non-compete agreements, and consider what is reasonable concerning time-frame. In other words, is it really fair to prevent an employee from working at any competitor in the whole country forever? What’s more reasonable is a two-year non-compete with specifically defined geographic boundaries.
How can an employer effectively enforce a non-compete agreement?
When an employee resigns — or when a worker is terminated — be sure to remind the person that he or she signed a non-compete agreement and the terms will be enforced. Spell out those terms: the geography, time limit and other specifics. Remind the employee that information cannot be taken in any form: written, electronic or from memory. That means no pulling sales contact lists from their heads, their company cell phones or using information transmitted in e-mails or other electronic forms (text messages, etc.). Emphasize that the non-compete agreement exists and they must abide by it.
If you suspect that a former employee has violated a non-compete agreement, there are several steps you can take. You can send them a demand to immediately cease and desist. Or, you can go to court and get an order to stop engaging in the suspected activity. A judge can make a decision as to whether or not there is an imminent threat and issue a temporary restraining order. A hearing will then be conducted to decide if the restraining order will continue by issuing a preliminary injunction. Ultimately, a permanent restraining order may be granted or denied once all evidence has been presented and all arguments heard.
What terms are often overlooked and should be included in a non-compete agreement?
Make sure there are clear policies regarding access to electronic information, including scope of authorization for access and use of the information during and after employment. Aside from the non-compete, be sure to include a policy for use of e-mail and transmission of documents outside of the organization and what happens to these documents upon termination of the employment relationship. You might want to include a provision that entitles your company to compensation for legal expenses and attorneys’ fees for enforcement of the non-compete agreement. It’s a good idea to agree to set a nominal bond for temporary restraining orders so enforcing a non-compete agreement does not become cost-prohibitive. Finally, remember — preparations to compete are not violations of a non-compete agreement. Consult with an attorney as you develop and enforce a non-compete agreement to ensure you’re covered legally.
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