Business owners who have non-compete and/or non-solicitation agreements in place with their employees should resist the temptation to place unmerited reliance on their usefulness and enforceability, that is, as a means for protecting against loss that could result from the departure of, and eventual direct competition from, a key employee. Business owners would also be well served to familiarize themselves with the similarities and differences between non-compete and non-solicitation agreements, and the limitations of each.
Both types of agreements can be used in a sound, comprehensive risk minimization strategy, but business owners should take care to know how these agreements can and should be used, and their limitations, which are considerable.
Both are interpreted by, and under, applicable state laws. This means that the state laws under which any particular agreement is interpreted is all-important with respect to utility and enforceability. For example, in Florida, such agreements are considered enforceable under many circumstances, while California laws strictly prohibit non-compete agreements and render them void. In Oklahoma, non-solicitation agreements are enforceable, while non-competes are not.
First, if you don’t have agreements such as these in place with your employees, read this article. Then talk to your legal counsel and determine their enforceability under the state where your employees work, and determine whether getting them in place is best for you. If you do have such agreements in place, but your agreements are more than a few years old or, after reading this article you are unsure of their quality or suitability, talk to your legal counsel.
Second, as stated, non-compete and non-solicitation agreements are governed by, and interpreted under, state employment law, fair trade and free commerce laws, and contract law. These areas are complex and grant employees great liberties in their pursuit of gainful employment and their right to enter into free trade, commerce and productive enterprise. Court dockets throughout the United States are filled with rulings whereby non-compete and non-solicitation agreements have been rendered null and void, leaving employers with virtually no recourse or protection against employees who have departed and competed – in many cases, causing considerable harm to their former employers.
Crafting Agreements with Higher Odds of Enforceability. Most unenforceability rulings are rendered due to language that is overly broad or unlawfully limiting on the employee’s rights and freedoms. In contrast, some state courts have upheld agreements that place narrower limits on an employee’s right to compete against his/her former employer. For this reason, business owners who wish to obtain some protection in these areas would be wise to use agreements that are narrower in scope and thereby have greater odds of being upheld by a court of law (or arbitrator), if challenged.
Anti-Piracy Agreements. An “anti-piracy” agreement is similar to a non-compete agreement but is much narrower. It attempts to restrict the terminated or departed employee from soliciting customers of his/her former employer and from making use of confidential information of his/her former employer. Because it is less restrictive on the employee, and less of a restraint on free trade, courts have been more willing to uphold it. As such, most employment law attorneys now suggest that employers use anti-piracy-type agreements. State courts across the United States feel that employees should not be restricted from engaging in the very business of the employer that they left.
Non-Solicitation Agreements. A non-solicitation agreement is even narrower than the anti-piracy agreement. It restricts the departed employee from soliciting business from established customers of the former employer but does not address the employee’s potential use of the former employer’s confidential information. These are generally enforceable so long as they are properly drafted and contain appropriate limitations.
Confidentiality Agreements. A confidentiality agreement is just that, an agreement by the employee not to disclose the employer’s sensitive and confidential information. These are enforceable agreements.
Multipronged Strategy Is Merited. Legal agreements should be just one part of a business owner’s strategy to protect his/her business from harm that could result from the departure of, and competition from, a departed employee. To be sure, protecting oneself from risks of this nature is difficult. Almost every business has employees who know the “secret sauce” or “the code,” or have long and deep relationships with important customers. Risk mitigation strategies that go beyond the legal agreement might include:
- Don’t allow any employee to know, or have access to, “the code” (so to speak). For example, Coca-Cola goes to great lengths to protect the Coke formula. In fact, it is my understanding that NO single employee has access to the formula.
- Limit the percentage of revenue secured or handled by any single person – such as a salesperson – whether he/she is an employee or independent representative.
- You, the business owner, should maintain a close, friendly relationship with each key customer. Similarly, establish your business practices such that more than one employee maintains a relationship with, or works with, each customer. In other words, don’t get into the situation where customer relationships rest primarily with just one of your employees. One idea is that if you have multiple salespersons, periodically rotate the ones assigned to each client.
Maybe you have other ideas for effectively dealing with these risks? Please send them to me and we’ll share them with our readers in future issues.
Be Prepared for Vehement Employee Resistance. Salespeople like power. Virtually all people try to gain and retain power. It’s human nature, a protective instinct. It feeds our natural desire for security. So salespersons naturally like and want to hold the bulk of the close relationships with customers.
When you implement changes that diminish an employee’s or representative’s power, he/she will resist. Some will resist vehemently, even quit or threaten to quit. Of course, the extent of the resistance will reveal the extent of your vulnerability. My suggestion is that you fight the battle today rather than continue to live with the risk and eventually suffer the consequences. I call things like this the path to “building a real business.”
If we want to build a business that is stable and enduring, we have to be willing to take action on important issues such as risks associated with employee departures.
Finally, employment agreements – or at least non-solicitation and/or anti-piracy agreements – can play a vital role in protecting your company. Talk to a skilled, respected attorney specializing in employment law about your particular situation, and don’t even dream of trying to establish an agreement on your own.
Michael Lissau, employment law specialist with the law firm of Hall Estill, generously provided his expertise for this article. Other resources used include:
“West Virginia Supreme Court Upholds Validity of Non-Piracy Agreements in Employment Contracts,” by Gerard Stowers of Bowles Rice McDavid Graff & Love LLP, headquartered in Charleston, West Virginia.
“Covenants Against Competition in Franchise Agreements,” Second Edition, 2004, American Bar Association, Second Edition, Peter J. Klarfeld, Editor
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2016.
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