Some of the most valuable aspects of your business are the goodwill you’ve developed (including your customer relationships), and the intellectual property you’ve produced. A noncompete agreement (http://www.entrepreneur.com/encyclopedia/term/82590.html) can be instrumental in protecting these aspects of your business from a range of problems with departing employees (http://www.bizjournals.com/seattle/morning_call/2011/01/microsoft-sues-ex-employee-for-job.html), including the spread of trade secrets and other confidential information to competitors. Today’s post will detail the legal requirements for your noncompete to be enforceable, and the benefits of using a noncompete agreement in your business.
Painting the Picture
At some point during the life of your business, you will likely need to recruit, train, and rely on employees to help grow (or maintain) your business. You’ll have to trust your employees since they will likely have access to your business’ confidential information. As part of the job, your employees will likely create long-lasting, valuable relationships with your customers. When the time comes for an employee to move on and cease working for your business think of what’s at stake; your employee may take advantage of your business’ goodwill, customer base, and any confidential product information. Maybe they’ll sell it to the highest bidder. Perhaps this is the worst case scenario, but it happens. It’s important you take the necessary steps to ensure that your employee doesn’t take the knowledge and customer relationships they developed while working for your business to a competitor (http://www.bizjournals.com/seattle/stories/2009/10/05/daily35.html), or perhaps to their own similar business they may start. This is why a noncompete agreement can be so important.
Requirements For a “Reasonable” Noncompete Agreement
Noncompete agreements generally become effective when an employee no longer works for your business. In Washington State, noncompete agreements must be “ reasonable (http://www.merriam-webster.com/dictionary/reasonable)” (perhaps the most prominent word in the legal field, and yet, the most undefined). Generally, courts will apply a three part test to determine whether the noncompete is reasonable:
- Whether the restriction on the employee is necessary to protect a legitimate business interest;
- Whether the restriction imposed on the employee is any greater than reasonably necessary to secure that business interest; and
- Whether the degree of injury to the public (losing you as an employee) is great enough to warrant a refusal to enforce the agreement.
In addition, since noncompete agreements are “ contracts (http://www.entrepreneur.com/article/175238),” there must be valid consideration (http://legal-dictionary.thefreedictionary.com/consideration); the employee must receive something of “value” in exchange for the promise not to compete with your business. Consideration, in these circumstances, is usually satisfied by employment or, if the individual is already employed, by promotions, raises, or other additional benefits. It’s important to note that a mere promise of continued employment to a current employee is not valid consideration.
Furthermore, in determining the reasonableness of the noncompete courts will look to the scope, territory, and time restraints imposed by the noncompete. An overly broad noncompete agreement (http://www.tradesecretslaw.com/2011/12/articles/noncompete-enforceability/oklahoma-supreme-court-nixes-overly-broad-noncompete-agreement/) (e.g. 10 years and spanning over the western half of the U.S.) will not be enforceable against an employee. Whether or not the noncompete is overly broad is generally determined according to the facts of each case. Courts tend to disfavor broad noncompete agreements that restrict an individual’s livelihood and ability to seek employment.
The Benefits to Your Business
A well drafted noncompete agreement, customized to meet your business’ specific needs, can protect you from a loss of business and costly litigation (http://www.dol.gov/_sec/media/reports/dunlop/section4.htm) down the road. A noncompete will also signal to your employees that you expect a degree of loyalty in return for their training and employment. This can be valuable in building long-lasting employment relationships for your business.
Also, with a proper noncompete in place and your expectations made clear upfront, your business’ valuable (and confidential) information can be protected and your employee will think twice before they choose to exploit any part of your business for their own, or a competitor’s, benefit.
When drafting your noncompete, you’ll want to take into account the legal requirements listed above to make sure your noncompete agreement will be enforeceable. Some of the requirements are not crystal clear and, while this can be a relatively simple agreement, it is useless to you if it turns out to be unenforceable. You should always consult a lawyer (http://www.invigorlaw.com/practice-areas/contracts/) when preparing any legal documents related to you and your business.
If you have any questions about drafting a noncompete agreement for your business, you can contact me directly at firstname.lastname@example.org.