Reprinted with permission. By, Michael D. Karpeles, partner, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. and HR.com
John is running a successful online computer supply business. He hires Ed, teaches him the ropes, and promotes him to general manager. Ed eventually quits, and within six months, has created his own online computer supply business nearby using many of the sales techniques he learned from John. John, of course, is furious, but he has little recourse against Ed unless Ed had previously signed a non-compete agreement with John.
Non-compete agreements (also known as restrictive covenants) are often included in employee contracts when workers begin a job or as separate agreements when they leave in exchange for severance. They are designed to prevent employees from using proprietary knowledge from one employer and passing the information to competitors or using the information to start their own company. Not all employees sign non-compete agreements. "At will" employees generally work without a written contract--they are not obligated to their former employer once they leave. Employees who sign employee contracts are most often privy to company secrets, customized procedures and customer information. Employees may balk at signing contracts containing non-compete agreements, claiming they restrict their freedom to pursue future employment, but from the employer's perspective, they are necessary when a business is trying to protect its interests. Interpretation of non-compete clauses varies from state to state. While a few states like California, Colorado, and North Dakota significantly restrict non-compete agreements between employers and employees, in most states courts will enforce non-compete clauses if their wording is considered fair and reasonable. Judges have been known to invalidate non-compete clauses if they appear too general or far-reaching. What to include in a non-compete clause:
--wording specifically stating the type of trade secrets and confidential information that the company seeks to protect;
--the duration of the non-compete period (no more than one or two years);
--a geographic restriction that is reasonable in scope to protect the employer's business (varies from case to case).
What constitutes company trade secrets or confidential information is usually up for interpretation. Secret product formulas or construction procedures are obvious, but is a company's list of customers confidential? It could be if the list includes pertinent information about each client that only an employee at the company would know. Wording of the non-compete clause must be thorough and specific if the employer expects it to be legally binding.
Workers who ignore the non-compete document and eventually sign with a competing company can be sued for breach of contract if it appears the employee is using the previous employer's confidential information at the new job. The new employer can also be sued for interfering with a contractual relationship between the former employer and its former employee. When hiring new employees, particularly executives or even middle managers, prospective employers should always inquire about the existence of any non-compete agreement. Non-compete agreements can be an effective tool to protect an employer's valuable investment in business processes, technology and customer relationships. When drafted carefully with the assistance of an experienced attorney, the employer can take some comfort in the fact that most courts are willing to enforce reasonable restrictions.
Michael D. Karpeles is a partner with the Chicago law firm of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. He heads the firm's labor and employment practice group.