What can (and can’t) a noncompete agreement include?
Noncompete agreements can be an effective way for small businesses to protect their trade secrets, client relationships and other intangible assets.
They do, however, have limits.
A noncompete is a form of a restrictive covenant, also referred to as a “covenant not to compete.” A noncompete agreement is used to restrict a former employee from competing with the employee’s former employer for a certain amount of time and within a defined geographic area.
These types of agreements are enforceable, but must be reasonable.
Restrictive covenants allow a company to protect its legitimate business interests—such as customer contacts, specialized training of employees, trade secrets, confidential business information, loss of clients, goodwill, reputation and referral sources.
For example, a noncompete agreement could be essential in the case of an employee who was a lead salesperson with established, long-term customer relationships that deal with several legitimate business interests of the employer.
However, it may be difficult to demonstrate these interests are implicated—and whether a noncompete is reasonable—by an employee who was not privy to confidential business information and did not have direct client relationships.
Courts do not permit the use of certain restrictive covenants to protect against ordinary competition. Instead, these agreements are permitted to prevent unfair competition. A restrictive covenant agreement should not include a blanket restriction that, if enforced, would result in preventing the employee from working within an industry or field indefinitely.
The time and territorial limitations should be reasonably defined to protect the employer’s legitimate business interests without placing an undue burden on the employee’s ability to secure other employment.
Noncompete agreements may also include another form of restrictive covenant: a nondisclosure agreement.
A nondisclosure agreement is used to prevent the disclosure of confidential and other trade secret information. State law also provides statutory protections for the unauthorized disclosure of trade secret information. However, not all information about a business is confidential or trade secret information.
These agreements should include a detailed description and examples of the confidential and trade secret information. A general description can make the agreement difficult to enforce.
Finally, a noncompete agreement may also include a nonsolicitation agreement, whereby a former employee agrees not to solicit customers of the former employer.
Employers are well served to have employees review and sign these agreements at the outset of the employee’s employment. In addition, appropriate policies should be developed—and consistently enforced—to advise employees of the confidentiality of company information. The company also should restrict access to trade secret and confidential information to only those individuals who have a legitimate need to use that information.
Ultimately, a restrictive covenant should not be approached as a one-size-fits-all type of document, but rather should be should be drafted to address the company’s operations and the specific employee’s role and responsibilities.