Agreeable agreements Featured

8:00pm EDT May 26, 2008

In today’s ultracompetitive economy, companies take significant measures to protect their assets and maintain their competitive edges. A company’s most valuable assets often include confidential (and maybe trade secret) information and its established relationships with its customers. When an employee leaves a company, will that employee be allowed to use the company’s confidential information or contact the company’s customers on behalf of another company? It depends, says Blake J. Burgan, partner for Taft Stettinius & Hollister LLP.

“If the employee did not sign a nondisclo-sure agreement, it would be difficult to prevent him or her from using any confidential information unless the company could establish that the information was a trade secret,” Burgan says. “In addition, without a noncom-pete agreement, that same employee would be able to compete for and even steal the very customers the employee dealt with while working for the former employer.”

To avoid this companies should consider entering into noncompete and nondisclosure agreements with their employees.

Smart Business spoke with Burgan about noncompete and nondisclosure agreements and how they help protect company assets.

What exactly are noncompete and nondisclo-sure agreements?

Noncompete and nondisclosure agreements are two of the most powerful tools employers can use. While the law regarding noncompetes is ever-changing, a properly drafted agreement allows a company to protect its assets by restricting a former employee from competing with it for a certain period of time in a particular geographic territory or from soliciting certain customers or clients of the company. Generally, a nondis-closure agreement — sometimes referred to as a confidentiality agreement — prohibits an employee’s use and disclosure of the company’s confidential information following termination of employment. While noncompete agreements must have durational limits, courts — at least in Indiana — have not required such limits on nondisclosure agreements. In other words, a company can prohibit a former employee from ever using or disclosing its confidential information.

What are companies entitled to protect with a noncompete?

A company cannot prevent an employee from using the general knowledge or skills gained during the course of employment. Instead, a company must have what is called a ‘protectible interest’ to support a noncom-pete. The two most common protectible interests recognized under Indiana law are customer relationships and confidential information/trade secrets. Companies routinely pay employees significant amounts of money to cultivate and maintain customer relationships, and those relationships are extremely valuable assets. With a noncom-pete, a company can prevent an employee from exploiting those relationships for a period of time after termination of employment. A company can also protect from disclosure competitively sensitive information, including trade secret information, to which an employee may have had access.

Who should sign noncompete and nondisclo-sure agreements?

Generally, companies should not require all employees to sign noncompete agreements.

Instead, they should consider entering into such agreements with management-level employees, employees with significant contact with customers and employees with significant access to confidential information. Even if a company does not utilize a non-compete agreement, it should at least have all employees with access to confidential information sign nondisclosure agreements. A properly drafted nondisclosure agreement may provide a company with even more protection for its information than is available under the Uniform Trade Secrets Act.

If a company doesn’t have noncompete agreements in place, is it too late?

No. While it is generally preferable to have employees sign such agreements at the inception of employment, companies in Indiana can require even current employees to sign such agreements. The reason is that continued employment is generally sufficient consideration to support a noncompete agreement.

Are noncompete agreements really enforceable in Indiana?

Yes. One of the most common misperceptions is that noncompetes are not worth writing because courts will not enforce them. That simply is not true. Reasonably drawn noncompete agreements are routinely enforced in Indiana, both in and out of court. The key to enforceability is reasonableness in terms of duration, geographic scope or customer restriction, and the scope of conduct prohibited. Companies should consult their legal counsel to review their current agreements or to draft new agreements in light of current Indiana law. A company often takes significant measures to protect its confidential information and customer relationships, and if it has not already done so, it should include noncom-pete agreements and nondisclosure agreements to help bolster that protection.

BLAKE J. BURGAN is a partner with Taft Stettinius & Hollister LLP and concentrates on employment law and litigation for business and governmental clients. Reach him at (317) 713-3596 or bburgan@taftlaw.com.