Drafting confidentiality, non-compete pacts

Unless you are a one-man operation, your company has to consider the consequences of having an employee leave the firm. The more valuable the employee is, the higher the risk that the person can harm you if he or she goes into competition with you. While there are situations in which the common law will give you some protection if an employee violates a fiduciary duty to the firm, any lawyer will

Unless you are a one-man operation, your company has to consider the consequences of having an employee leave the firm. The more valuable the employee is, the higher the risk that the person can harm you if he or she goes into competition with you. While there are situations in which the “common law” will give you some protection if an employee violates a “fiduciary duty” to the firm, any lawyer will tell you that it is much, much better to have written agreements with the employees on this subject.

While I hear many company owners complain that “non-competes are not enforceable, so why bother,” it is my belief that in most all cases, the unenforceability is a result of insufficient thought being given to the drafting of the documents. There are many issues that have to be considered in order to arrive at an appropriate (and enforceable) agreement:

What are you trying to protect? Different employees have different levels of access to information.

Someone in estimating may have access to your “trade secret” labor rates or crew mixes.

Someone in purchasing may know which vendors are giving you better pricing than your competitors.

Someone in sales may have developed relationships with potential clients.

For how long do you need the protection? The longer the non-compete goes on, the harder it is to get a court to enforce it. There is a general bias against non-competes so they have to be “fair.” Some considerations are:

How long was the person employed by you? If he's only been there two months, will you be able to enforce a two-year non-compete?

How long will it take you to get someone else up to speed on the prior employee's work?

Some things, like protection of confidential information, have no expiration date on them.

In what geographic area do you need protection? Courts are not going to enforce a person's ability to earn a living any more than necessary to protect the former employer, so thought needs to be given as to how big an area the non-compete should cover. If you only operate in a three-county area, there is no need to keep someone from working in an entire state. You will have to prove that you are actually working in the area of the restriction.

What about just restricting solicitation of your customers and prospects? A court might be more willing to enforce an agreement that allows a former employee to stay in the industry he or she has been working in for years and just restricts the customers he can work with. Current, active customers should be easy to identify. Prospective customers will be harder to pin down. Many companies require people in sales to enter anyone they are approaching into a prospect list (to keep track of who is entitled to a commission), so this information can be available anyway. A non-solicitation agreement would still have to have an expiration date.

What were the circumstances of the departure? An employee who is let go due to lack of work (a reduction in force) or other termination without cause probably will not be bound by a non-compete, although she would be bound by a confidentiality agreement. An employee who is fired for cause probably will be bound by the non-compete because it was (theoretically) within the employee's power to avoid the termination. There generally is a public policy against encouraging people to do such bad work that they are terminated and thus freed of the non-compete.

Confidentiality of your data. A company's right to keep its proprietary information confidential is pretty readily enforced by courts. Even if an employee can go to work for a competing firm, she cannot use information that constitutes your trade secrets, and this obligation has no time limitation. The difficulty is pinning down what actually is the agreed upon confidential information. Employers can solve this problem by having a written agreement with employees that sets out exactly what information will be considered confidential. However, it often is hard to craft descriptions of information that doesn't exist at the time the agreement is signed.

A separate agreement or in an employment agreement? Many companies do not have employment agreements with their employees, or for various reasons, they do want to require them. Some lawyers will advise clients that even if they have employment agreements, they should put the non-competition, non-solicitation and/or confidentiality terms in a separate document so that all of the employment agreement's terms won't appear to be tied in with these terms if a dispute later arises and the matter ends up in court. Employers should ask for an attorney's opinion about this matter.

Consideration. This is the legal term to describe what the employee gets in exchange for agreeing to restrict his future rights. There has to be some sort of “valuable” consideration for any of these agreements. An offer of employment is generally enough. However, asking a current employee to sign such an agreement as a condition of continued employment may not be sufficient, particularly if the employee later states that she was “coerced” into signing it with a threat of termination if she did not. States vary on how they view this issue of “how much is enough?”

This is one area where a business needs the counsel of an attorney who has a particular expertise in employment law.

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to [email protected].

TAGS: Law