Sample Policy: Noncompete Agreements

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“The undersigned understands and agrees that the Company has a vital interest in retaining the loyalty, fidelity and continued employment and association of its employees and customers. He/she warrants, covenants and agrees that while employed by the Company and for a period of one (1) year following termination of his/her employment with the Company for any reason, he/she shall not, directly or indirectly, (i) induce, solicit, offer or recruit or attempt to induce, solicit, offer or recruit any registered representative of the Company to apply for or accept employment with any other person or entity engaged in the securities business, or which is in any manner in competition with the Company; or (ii) induce, solicit, or attempt to induce or solicit any customer of the Company to move his, her or its account out of the Company.

“Notwithstanding any provision set forth in this paragraph, upon termination of employment with the Company, the Employee may contact, solicit or do business with any customers whose accounts he/she serviced at any time prior to employment at the Company. To avoid any misunderstanding regarding the identification of such customers, the Employee agrees to provide the Company a written list of such customers within ten (10) days of his/her date of hire.”

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WHAT’S AT ISSUE:

Citizens who disclose state secrets to foreign governments are typically jailed. But ex-employees who share your hard-won trade secrets with competitors—or go into competition with you themselves—can be hard to curb. Given the potential financial stakes, there’s good reason for the growing interest among employers in asking key employees to sign noncompete agreements.

These agreements are designed to ensure that moonlighting or former employees won’t use what you’ve taught them to compete with you. The agreements often include nondisclosure clauses. Employers hope that by adding them to their policy arsenals, and by having them signed as a condition of employment (or continued employment), they’ll protect themselves. Trouble is, such agreements are easier signed than enforced, for a number of reasons.

• Laws vary from state to state. Many courts and legislatures consider noncompetes a violation of public policy because they restrain competition and limit the individual’s right to earn a living. California is perhaps the most stringent; it will enforce noncompetes only against a company’s shareholders—nonshareholder employees can’t be held to them.
• The agreement or its terms may be judged unreasonable. You have to go to court (or arbitration) to enforce a noncompete agreement. Thus, it’s up to the judge or arbitrator to decide whether it’s reasonable. If you can’t show the agreement is necessary to protect a legitimate business interest, such as a trade secret, the judge may consider it a restraint of trade and throw out your case. In New York, for example, you’ll need to prove that (1) the agreement is necessary to prevent disclosure of trade secrets; (2) the departing individual is unique, probably impossible to replace and, if working for a competitor, likely to disclose trade secrets; and (3) the terms and scope of the agreement meet a test of reasonableness. In other words, you can’t make an agreement so restrictive that your ex-employee can’t earn a living.
• You offered no quid pro quo. The agreement isn’t legally binding unless the employer offers the employee something in return for signing it.
• Enforcement is costly. You’ll probably have to sue the ex-employee, a move that entails major expenditures of time and money. But if you don’t fight breaches of contract, your noncompetes will be meaningless.
• Firing the employee may nullify the agreement. A court ruled against an employer who tried to enforce a noncompete agreement against a salesperson whom it fired for poor performance. The judges said that by firing him, the company “deems the employee worthless.” Thus, they reasoned, there couldn’t be any harm if he went to work for a rival. However, they ruled the agreement’s nondisclosure provisions were still enforceable.

If, despite the foregoing, you’d still like to draw up a noncompete agreement for your key employees to sign (or continue using your present agreement), carefully consider the following issues:

Business necessity: Does your company have legitimate trade secrets to protect?

Unique individual: Can you demonstrate that the individual’s contribution is such that you can’t replace him or that the loss of his services will cause your business irreparable injury? Merely being a key or senior executive won’t necessarily cut it.

Limitations: Does your agreement, or one you are considering, include time and geographic limitations? The courts not only favor free trade but also try to prevent ex-employees from suffering undue hardship in marketing their skills. Thus, enforceable agreements include time frames (typically with a maximum of one to two years) and geographic restrictions suited both to the scope of the ex-employee’s job and to your business operations and industry. Geographical limits should reflect only the areas in which you operate or reasonably expect to operate.

Generally, the more restrictive the agreement, the tougher it will be to enforce because individuals must be given a reasonable opportunity to pursue a livelihood in their chosen fields. However, the courts do allow more severe restrictions on top managers than on lower-level employees.

Quid pro quo: What do you offer the employee in return for signing the agreement? The court will consider it coerced, thus null, if you fail to give the employee something in return. In many states, that “something” for a new hire may be the job itself. For established employees, you’ll probably have to offer a bonus or promotion. Again, consult with your lawyer to ensure that your quid pro quo passes muster under your state’s laws.

Clarity: Is the agreement written in plain English? The less complex the wording, the less room for argument or challenge by the employee.

Judicial discretion: Does your agreement contain a “blue-pencil provision”: that is, a provision that allows the judge to change some of the terms? If not, the judge may have to invalidate the entire agreement if she finds even one term unreasonable.

Tailoring: Owing to widely differing state laws, judicial preferences and the like, you’ll need to tailor any off-the-shelf agreements to your particular situation. So plan to consult long and hard with your attorney. This is one area in which any agreement is definitely not better than none at all.

Noncompete agreements can help protect your business from unscrupulous ex-employees—but only in certain states and only if they are carefully drawn. Work with an attorney who is familiar with the laws of your state and the general tenor of applicable judicial rulings.