Covering your assets Featured

8:00pm EDT June 29, 2005

The most valuable assets for many companies are proprietary information and business relationships. Employees may also have significant personal knowledge. Employers may use noncompete agreements as a way to prevent their competitors from acquiring access to their proprietary information or customer goodwill by hiring former employees. A covenant not to compete confers protections that cannot be achieved without a contract. Confidentiality agreements and even statutory claims under the Trade Secrets Act can be less effective in preventing trade-secret loss. Both employers and employees should understand the essential elements of enforceable noncompete restrictions, as well as some alternatives to general noncompete agreements, that may also be considered.

Enforceable agreements

Covenants not to compete are enforceable in most states. The following five factors are typically used when evaluating the reasonableness of a restrictive covenant relating to employment.

  • The length of time the restriction operates
  • The geographical area covered
  • The fairness of and need for the protection accorded to the employer
  • The effect of the restraint on the employee's opportunity to pursue his occupation
  • The extent of interference with the public's interests

Striking the proper balance among these factors is vital. The first two factors -- length of time and geographic scope --- are based on reasonableness and vary with each case. In applying the third factor, courts recognize several protectable business interests, including those in trade secrets, customer goodwill and special training imparted to employees.

Courts balance the employer's protectable interests against the employee's interest in working. Finally, the public interest favors fair competition and disfavors restraints on trade. Collectively, these principles operate against the enforceability of overly broad, aggressive noncompete agreements.

In addition, an enforceable agreement must be supported by adequate consideration. If a covenant is entered into at the inception of employment, the new job is adequate consideration. However, if a covenant is offered after the inception of employment, then generally the agreement must be supported by separate consideration. In some states, including Pennsylvania, continued employment alone will not provide sufficient consideration for a noncompete agreement.

Practical measures

Employers compete with each other for talent, and some employees may avoid employment with companies that require general noncompete agreements. Alternatives to general noncompete agreements exist that do not provide the same level of protection to the business, but still confer significant protection and may be less of a barrier to recruitment. The alternatives include prohibitions on soliciting or doing work for clients or customers of the business, prohibitions on soliciting or hiring employees of the business, and agreements to safeguard and not misuse confidential information.

Employers should also adopt practical precautions to identify and secure confidential information, including restricting access. Departing employees should be reminded of their obligations. Employers should also ensure that confidential information is not inadvertently disclosed through third parties. For example, employers should insist on confidentiality and nondisclosure agreements with vendors, customers, investors, contractors, data testers and others with access to information.

Thoughtful analysis of an employer's confidential business information and the best ways to protect it will maximize the ability to prevent injury resulting from the loss and misuse of such information and to respond effectively to challenges presented by departing employees. Employees should also understand the nature of their obligations, both going into and leaving a new employment relationship. Employees should not naively believe that noncompete restrictions are unenforceable, when in fact properly drafted restrictions are enforceable. Employees should also not expose themselves or potential future employers to liability by transmitting confidential information belonging to prior employers.

Lynn C. Outwater, Esq., is the managing partner of the Pittsburgh Office of Jackson Lewis LLP. Joseph S. Palmiero, Esq., is an associate in the same office. With 21 offices across the country, Jackson Lewis represents management exclusively in workplace law and preventive strategies. Reach them at outwatel@jacksonlewis.com, palmierj@jacksonlewis.com or (412)-232-0404. Louis Kushner, Esq., is the department head and Alan Blanco, Esq., is a partner in the Labor & Employment Department of Rothman Gordon P.C. Rothman Gordon represents professionals, executives and unions in employment matters. Kushner and Blanco can be reached at lbkushner@rothmangordon.com, acblanco@rothmangordon.com or (412) 338-1100.