Should You Always Enforce Covenants Not to Compete?
Covenants not to compete are binding contracts that are designed to protect companies against exiting employees unlawfully sharing different types of proprietary information, “trade secrets” and intellectual property with their new employers and others and engaging in post-employment activities that can be detrimental to the company they left.
Before discussing whether it’s wise to develop an ironclad attitude toward enforcing these covenants, it’s helpful to review the basic reasons why these documents are usually drafted and what standards courts consider when deciding whether they should be upheld.
Companies must protect specific types of information
Whether your business sells cutting-edge security software or sends out consultants to advise clients in mostly rural areas, your employees often learn highly detailed information about how you help your clients. If you were to always let key employees leave and immediately put that proprietary information and knowledge to work for a competitor, your business might quickly lose its competitive edge and market dominance.
Therefore, many companies regularly require employees to sign noncompete agreements to prevent them from using what they learn while employed for a limited time post-employment. Should former employees violate these agreements, they (and their new employers) can often be sued in court.
Common types of proprietary interests you’ll usually want to protect
Trade secrets. Perhaps your company has invented a manufacturing process that should not be shared with any competitors. It’s also possible that you’ve designed a highly effective training program for your employees that makes them uniquely effective at handling their work. You clearly don’t want them to share those training methods with others;
Client databases. You’ll want to prevent all departing employees from reviewing any past buying practices, requests and needs of your clients;
Other highly confidential materials. These could include almost anything – perhaps you’ve implemented a specialized marketing plan that’s helped your business grow several times over during recent years.
These examples should help remind you of the many proprietary types of information you must protect by requiring your exiting employees to sign covenants not to compete.
Within such covenants, you’ll need to address various topics that may include the following ones.
A specific time period. Any time period must be reasonable, normally 1-3 years;
A description of the types activities the employee cannot engage in post-employment. You can list specific industries, customers or businesses the departing employee should not contact for a new employer;
A specific geographical area where the departing employee cannot work. You can state a certain region where the employee who left cannot compete with you for a set time period.
When evaluating the reasonableness of covenants not to compete, courts look to see if they are over-broad or too restrictive. While businesses have a right to protect certain information or “legitimate business interests”, they aren’t allowed to unfairly prevent a departing employee from pursuing most forms of gainful employment.
Should you always enforce your contracts containing noncompete clauses?
Although the most obvious response is to say you’ll always strictly enforce them, it’s important to recognize certain factors before suing someone for not honoring a noncompete covenant.
Please feel free to contact one of our Murray Lobb attorneys so we can help you draft any contracts you need containing covenants not to compete. We can that someone is currently asking you to sign – or assist you in enforcing or defending a lawsuit.