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Why and How to Utilize Noncompete Agreements?

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     The number of employers utilizing noncompete agreements is growing rapidly.  This is due, in part, to the heightened awareness of the value of trade secrets and confidential information, and the risk of losing the same to competitors.  A well written noncompete agreement will require employees (and/or partners) to refrain from competing and working for competitors for a certain period following employment.  This article addresses issues that should be considered when deciding whether to require the signing of noncompete agreements and how to utilize and creat non-compete agreements.

The "Why?"

     Non-compete agreements deter employees from leaving your business, as well as deter them from compete against your business.  In addition, such agreements can protect your the confidential information and trade secrets of your business.

    Employees that are privy to your sensitive and valuable business information and trade secrets should be bound to refrain from using such and disclosing such to anyone including, your competitors.  Thus, non-compete agreements should contain confidentiality provisions.

     In most states, a trade secret may consist of any idea, pattern, formula, physical device, compilation of information or process that both (a) provides the owner of the information with a competitive advantage in the marketplace; and (b) is consistently treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent theft or improper acquisition, etc. Click here for more information on trade secrets, Trade Secrets FAQ.

Everyone would like to trust their employees and partners, however, when an employee or partner who is privy to such information leaves the business voluntarily or otherwise, she/he could use your valuable information for her/his own benefit.  Moreover, some people innocently divulge sensitive information, not knowing that the information may be overheard by a competitor or someone with a relationship with a competitor.  Noncompete agreements should state clearly that the information and materials do have value and that such should be disclosed to no third party. 

     In addition, time and time again, former employees and former partners use existing trade secrets to start their own competing businesses.  A well drafted non-compete agreement can reduce the risk of such occurring and provide you with contract rights in the event of such an occurrence.

     While noncompete agreements are an effective way to protect your business's trade secrets, there is a high value placed by the legal system, on a person's right to earn a living. For your noncompete agreement to pass legal scrutney, certain criterial must be considered.

The "How?"

Good Reason Versus Penalty.

     Your business will need a sound business reason for requiring an employee to sign a noncompete agreement.  The noncompete agreement's purpose cannot be to solely to punish an employee for leaving your business.  Typically, the purpose is to protect your trade secrets or other confidential information that has been developed and/or acquired by the business.

     Note, noncompete agreements against employees who actually (versus potentially) were privy to trade secrets are generally more likely to be enforced by courts.

Employees must be Provided a Benefit/Consideration in exchange for the promises made.

Provide a benefit/consideration to the employee in exchange for her/his promises concerning not competing and confidentiality provisions. The offering of employment, an actual promotion or a raise, will generally satisfy the consideration requirement, for such promises.

Noncompete Agreements Must Contain Reasonable Terms

     Generally, a noncompete agreement must also be "reasonable." What amounts to reasonable?

     The term of the restricted activity cannot be unreasonably long and the territory within which the activity is restricted, may not be too broad geographically.  In addition, it cannot prohibit the former employee from engaging in too many business types.   The most common provision rendering non-compete agreements unenforceable is the duration of the prohibition.  While there is no bright line, noncompete agreements with restricted periods ranging from six months to two years following termination of employment are often considered "reasonable;" however, longer durations are less likely to be upheld.  Longer non-compete agreements with non-employees (e.g.,  partnership agreements and sales of businesses) will often be enforced.

Issues to Consider when Creating a Noncompete Agreement

Issues to consider when creating a noncompete agreement, generally include the following:

• For which employees will you require a signed noncompete agreement.  How valuable is the employee? Will you train the employee?  Will the employee be privy to information that would be harmful if in the hands of a competitor?  There should be a valid reason for requiring the signing of the noncompete agreement.  Keep a record of the reasons for each employee, for future inquiries.

• Implement an agreement that is reasonable, giving the nature of your business, the trade secrets and information, not one that will simply punish an employee for leaving your business.

Notes regarding Maine Noncompete Agreements.  Maine is a blue pencil state.  Thus, if the non-compete agreement appears to be unreasonable, there is a good chance that a Maine judge or justice will redraft the agreement to make it reasonable and enforceable, even if it were unenforceable in other states.  If you are an employee or former employee and have signed an agreement in this state, beware that even if it appears unreasonable, it may be enforceable.

Notes regarding California Noncompete Agreements. California statute invalidates noncompete agreements except in very limited circumstances and California judges most often will not enforce a noncompete agreement against an employee. California businesses may consider utilizing nonsolicitation agreements and nondisclosure agreements to protect trade secrets, client lists and other confidential information.

The above is not an exclusive list of issues.

Keys:Maine noncompete agreements, Mass noncompete agreements, Maine non-compete agreements, Mass non-compete agreements, non-compete agreement lawyer, non-compete agreement attorney 

When you are ready to discuss the legal issues associated with your business, click here to contact Michelle L. Grenier, Esq.

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