Stay updated on our latest
articles with RSS
A client of mine - the president of a mid-size company - was recently asked to sign a noncompete agreement as part of a business sale. "Should I sign it," he asked me over drinks at a recent conference we both attended. "And what if I don't," he added.
"Do you have a good lawyer? "I said.
What does a noncompete mean and what does it cover? And what do you need to know about a nonsolicitation agreement?
When the economy is booming and top talent is hard to find, lots of companies take them away because having them would make it difficult to attract people. But just like marriage and prenuptial agreements - for better or worse and 'til death do us part - noncompetes are here to stay.
There aren't many business contracts that don't include some kind of noncompete agreement. Most involve the sale of a business, or deal with employment agreements and partnerships. Here are some things you should know about noncompetes.
What Does "Compete" Mean?
A standard noncompete prohibits you from being an employee, consultant, officer, director, owner, lender, principal, agent, dealer, partner, distributor, representative, contractor, broker, or trustee of a competing firm. Some even prohibit you from investing in a competitor.
Reasons For a Noncompete.
In an employment agreement, a noncompete is added to prevent the employee from leaving the company and stealing customers (and company information) for his or her new business.
A noncompete in a business sale is primarily designed to prevent the former owner or key executives from opening up a competing business down the street and taking the business customers. A noncompete would also be included in a partnership for the same reason - to keep a former partner from opening a competing business.
Restrictions in a Noncompete.
A noncompete agreement imposes three types of restrictions:
1. Time - a noncompete restricts someone from opening a competing business within a certain time period.
2. Distance - a noncompete also restricts someone from opening a competing business within a certain distance from the original business.
3. Type of Business - noncompetes also restrict businesses of similar types from competing with former businesses
Often, noncompete agreements are difficult to enforce because they may unduly restrict an individual from legitimately going into business and earning a living. Reasonableness is decided by a court of law, or through mediation or arbitration. What's more, a decision is always made according to the laws of a specific state. And since state laws vary, the outcome may not always be certain.
Noncompetes vs. Nonsolicitation and Nondisclosure Agreements.
If you don't want anyone walking out with valuable information about your company's business, you can protect yourself with nondisclosure and nonsolicitation agreements, which courts generally favor.
Compared to a noncompete, a nonsolicitation agreement is an attempt to prevent a former employee, partner, or owner from soliciting customers and employees of the former company. Nondisclosure agreements prevent present or past employees from disclosing commercially sensitive information belonging to the employer. Many contracts combine noncompete, nonsolicitation, and nondisclosure agreements.
Enforceability of Noncompete Agreements Differs From State to State.
Whether a court will enforce an agreement restricting a former employee's right to seek employment with a competing company depends on which state's law applies, according to a recent article in SHRM Online, from which much of the information presented here has been taken.
For example, in California, noncompete agreements are illegal - there is a statute that says that employers cannot enforce them. In Ohio and New York, they are routinely enforced. Georgia is "somewhere in the middle," holding noncompetes to a stricter standard than in many states.
And in Texas, such agreements were not enforced for years, but since October 2006, they will be enforced "if done right," the same article adds.
One Size Does Not Fit All.
Noncompete agreements must be "distinguishable" from standard business contracts, which, in the absence of fraud or undue influence, will usually be enforced as written.
The most important thing you need to do when drafting noncompete agreements is to think strategically about the particular employee. What are you concerned about this person doing when he or she leaves? Whatever you're thinking, it's in your company's best interests to write a reasonable and enforceable noncompete.
Ask Questions When Hiring.
In addition to an increase in litigation by companies seeking to enforce these agreements, there has also been an increase in companies being sued for hiring employees in violation of agreements drafted by their former employers.
So if you're the hiring company, it's critical to ask the people that you are thinking of hiring if they are subject to any kind of noncompete restrictions. (It's something we always ask candidates on behalf of our client companies.) You need to know if hiring an individual will subject you to a potential lawsuit.
Protect Your Assets.
A lawyer-drawn agreement tailored to the law and the specifics of your business will have the best chance of being binding. To protect you and your company's assets, consult an employment law attorney when considering an agreement not to compete.
This material is provided as general information only and does not constitute and is not a substitute for legal or other professional advice.
"Do you have a good lawyer? "I said.
What does a noncompete mean and what does it cover? And what do you need to know about a nonsolicitation agreement?
When the economy is booming and top talent is hard to find, lots of companies take them away because having them would make it difficult to attract people. But just like marriage and prenuptial agreements - for better or worse and 'til death do us part - noncompetes are here to stay.
There aren't many business contracts that don't include some kind of noncompete agreement. Most involve the sale of a business, or deal with employment agreements and partnerships. Here are some things you should know about noncompetes.
What Does "Compete" Mean?
A standard noncompete prohibits you from being an employee, consultant, officer, director, owner, lender, principal, agent, dealer, partner, distributor, representative, contractor, broker, or trustee of a competing firm. Some even prohibit you from investing in a competitor.
Reasons For a Noncompete.
In an employment agreement, a noncompete is added to prevent the employee from leaving the company and stealing customers (and company information) for his or her new business.
A noncompete in a business sale is primarily designed to prevent the former owner or key executives from opening up a competing business down the street and taking the business customers. A noncompete would also be included in a partnership for the same reason - to keep a former partner from opening a competing business.
Restrictions in a Noncompete.
A noncompete agreement imposes three types of restrictions:
1. Time - a noncompete restricts someone from opening a competing business within a certain time period.
2. Distance - a noncompete also restricts someone from opening a competing business within a certain distance from the original business.
3. Type of Business - noncompetes also restrict businesses of similar types from competing with former businesses
Often, noncompete agreements are difficult to enforce because they may unduly restrict an individual from legitimately going into business and earning a living. Reasonableness is decided by a court of law, or through mediation or arbitration. What's more, a decision is always made according to the laws of a specific state. And since state laws vary, the outcome may not always be certain.
Noncompetes vs. Nonsolicitation and Nondisclosure Agreements.
If you don't want anyone walking out with valuable information about your company's business, you can protect yourself with nondisclosure and nonsolicitation agreements, which courts generally favor.
Compared to a noncompete, a nonsolicitation agreement is an attempt to prevent a former employee, partner, or owner from soliciting customers and employees of the former company. Nondisclosure agreements prevent present or past employees from disclosing commercially sensitive information belonging to the employer. Many contracts combine noncompete, nonsolicitation, and nondisclosure agreements.
Enforceability of Noncompete Agreements Differs From State to State.
Whether a court will enforce an agreement restricting a former employee's right to seek employment with a competing company depends on which state's law applies, according to a recent article in SHRM Online, from which much of the information presented here has been taken.
For example, in California, noncompete agreements are illegal - there is a statute that says that employers cannot enforce them. In Ohio and New York, they are routinely enforced. Georgia is "somewhere in the middle," holding noncompetes to a stricter standard than in many states.
And in Texas, such agreements were not enforced for years, but since October 2006, they will be enforced "if done right," the same article adds.
One Size Does Not Fit All.
Noncompete agreements must be "distinguishable" from standard business contracts, which, in the absence of fraud or undue influence, will usually be enforced as written.
The most important thing you need to do when drafting noncompete agreements is to think strategically about the particular employee. What are you concerned about this person doing when he or she leaves? Whatever you're thinking, it's in your company's best interests to write a reasonable and enforceable noncompete.
Ask Questions When Hiring.
In addition to an increase in litigation by companies seeking to enforce these agreements, there has also been an increase in companies being sued for hiring employees in violation of agreements drafted by their former employers.
So if you're the hiring company, it's critical to ask the people that you are thinking of hiring if they are subject to any kind of noncompete restrictions. (It's something we always ask candidates on behalf of our client companies.) You need to know if hiring an individual will subject you to a potential lawsuit.
Protect Your Assets.
A lawyer-drawn agreement tailored to the law and the specifics of your business will have the best chance of being binding. To protect you and your company's assets, consult an employment law attorney when considering an agreement not to compete.
This material is provided as general information only and does not constitute and is not a substitute for legal or other professional advice.