Many businesses use non-compete agreements, but few use them effectively. If you are in court trying to enforce such an agreement, not only do you have to convince the judge that your agreement is lawful, but you have to convince the judge that she or he should issue an order putting someone out of work or restricting their employment activities.
Following these simple steps will decrease the likelihood that you will find yourself in such a situation, and increase the likelihood that you will prevail, if you do.
Tip No. 1: Consider what you need (Not what you can get away with)
Many businesses employ a single, overbroad non-compete that they have all of their employees sign. These businesses assume that their employees will not have the resources to challenge such agreements and, if they do, that a court will simply modify the agreement to make it enforceable. These assumptions are wrong.
First, I can assure you that at least one of your employees has the financial resources to purchase an hour of legal advice, a relative who happens to be a lawyer who is willing to look at the agreement gratis, or a new employer who will have their lawyer look at the agreement. This employee will then tell your other employees that your agreement is overbroad and unenforceable, and your agreement will then have very little deterrent effect.
Second, while you may assume that a court will modify the agreement to make it enforceable, courts do not have to do so (unless you are in Florida). If your agreement is overbroad, the court may not care to take the time to craft an enforceable one for you.
Accordingly, spend an hour talking to your lawyer about what you need your restrictive covenants to do for you. For example, do you really need to prevent that sales representative from accepting any position with a competitor for three years? Or do you just need them to stay away from the customers with whom they worked for 12 months so that your new sales representative can build relationships with these customers? This up-front investment is not as expensive as you think and is worth every penny.
Tip No. 2: Be up front with your candidates
Many employers do not tell applicants that a non-compete will be required until the employee shows up for work on their first day and they find a non-compete tucked into a stack of human resources paperwork. There are an increasing number of states that will automatically void a non-compete under such circumstances. The best practice is to tell your applicants, in writing, that you will require a non-compete and to provide them with a copy of the agreement prior to or in conjunction with a job offer. This simple step costs you absolutely nothing.
Tip No. 3: Consider your boilerplate clauses
Some businesses borrow language from their standard agreements in drafting non-competes. Non-competes, however, are not ordinary agreements, and careful thought should be given as to what “standard” clauses from your other agreements should be included.
- Definitions: Definitions are important in non-compete agreements. If you define “company,” for example, to include your subsidiaries and affiliates, you have just given me a very good argument as to why your non-compete is overbroad and unenforceable.
- Arbitration Clauses: In the event an employee breaches a non-compete, you likely want immediate injunctive relief. You will not get quick, injunctive relief from an arbitrator.
- Liquidated Damages Clauses: In order to get injunctive relief, you need to show the court that you do not have an adequate remedy at law. If you have a liquidated damages clause, some courts will conclude that you have an adequate remedy at law and deny your request for injunctive relief.
- Assignment: Some states consider non-compete agreements personal service contracts that cannot be assigned to another company without the employee’s consent. Include a clause providing you with such consent in your non-compete agreement.
- Severability/Modification: If you are in a state that allows a court to modify your non-compete agreements, the court may first look to your agreement for evidence that the parties wanted the court to do so. Accordingly, include a clause that advises the court that they can modify the agreement.
Following these simple, affordable steps will increase the effectiveness of your non-competes agreements and, in turn, better protect your business interests.
Nicole Druckrey, a partner at Quarles & Brady LLP in Milwaukee, practices in the firm’s Commercial Litigation Group and serves as the chair of the firm’s Trade Secrets and Unfair Competition Team. She regularly handles disputes over noncompete agreements, trade secrets, allegations of fraud, breaches of fiduciary duty and contract breaches.
