Business owners are aware that employees often leave and go work for a competitor. Because of this, employers sometimes use noncompete agreements to help protect against employees sharing client lists, divulging trade secrets or inside information to a competitor. When employees leave an organization they can create a competitive advantage by divulging confidential information about the former employer’s business practices, client lists or trade secrets to a competitor. Trade secrets are anything that makes the business unique. For example, a trade secret could be a method of doing something, technique, business process or program that has some level of economic value. The goal of a noncompete agreement is to keep an employee from taking information they had access to or information they learned to a competing business.
Noncompete agreements need to be balanced to protect both the employer as well as the employee. It doesn’t make sense to have such tight limitations that an employee is banned from performing the work they were trained to do. At the same time, an employee should not be able to go to a competitor and give them an unfair advantage because an employee walks out the door with client lists, information about internal workings of the organization or confidential trade secrets. There needs to be a balance between protecting the employer and protecting the employee’s right to make a living.
For noncompete agreements to be enforceable, they need to have reasonable geographic and time period limitations. The agreement should also have a clear business purpose for doing so and should not limit an employee’s ability to find employment.
To determine if a noncompete agreement is enforceable, the following questions should be answered:
- Does the agreement impose an undue hardship on the employee?
- Is it injurious to the public interest?
- Is the restriction greater than necessary to protect the legitimate interest of the employer?
- Does the employer have a business interest to protect?
Think of this scenario. You are a business owner who makes bees wax candles. You have created a streamlined process that allows you to produce candles at a rate that is twice what other competitors can produce, resulting in lower production costs for you and ultimately less expensive candles. If an employee takes this process to a competitor, it creates an unfair advantage for your company. This might be an example of a time when a noncompete agreement would be appropriate.
So what happens if a noncompete agreement is enforceable and an employee ignores their agreement? This is not a good thing for the employee or the hiring employer. There have been cases that the former employer won litigation and was awarded damages based on profits made as a result of violating the agreement. The award included compensatory damages as well as attorney fees. For this reason, hiring employers should be aware of noncompete agreements from prior employers before making a hiring decision.
If a noncompete agreement is reasonable with its limitations and clearly written to protect the employer’s confidential information and or/trade secrets, it is much more likely to be enforceable than one that is targeted to limit competition.
Every state has different laws on noncompete agreements, so it is important to have an attorney look at an agreement to ensure it is enforceable and complies with local laws.
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