Three Tips for Businesses Using Non-Competes and Non-Solicitation Agreements
In the information economy, managing employee knowledge is critical. Recent labor trends of decreasing employee tenure only heightens the importance for businesses and employers to take pro-active steps in protecting sensitive information and relationships developed in the course of business from frequent employee turnover. Regardless of industry, employment agreements such as non-competes and non-solicitation agreements are important tools in guarding your business interests.
Non-competes and non-solicitation agreements, however, also run the danger of being a drain on resources if businesses fail to use them wisely. With that in mind, we have three tips for businesses considering their current or future use of non-competes and non-solicitation agreements.
- Be Intentional
Non-competes and non-solicitation agreements are contracts and, like any contract, are only as good as the effort put into them. No matter the amount of resources spent in developing these agreements, all of their value can be lost if not used in an intentional and purposeful way. We suggest three ways that employers should consider being intentional in their use of non-compete and non-solicitation agreements.
First, businesses using or considering the use of these agreements should develop policies and procedures that govern how and when they enter into non-competes and non-solicitation agreements. For example, non-competes and non-solicitation agreements require consideration to be enforceable. In North Carolina, an offer of employment can be sufficient consideration so long as the non-compete and non-solicitation agreement is a term of the employment offer. An employer who fails to include these agreements as part of the initial employment offer would have to offer its employees consideration in addition to employment in order to obtain an enforceable agreement. Consequently, policies and procedures that review the inclusion of these agreements as an initial term of employment can be costly for business in terms of both resources and human capital.
Second, businesses using or considering the use of these agreements should adopt policies and procedures that complement the protections obtained by the agreement. Employers who use these agreements should take steps in other contexts to protect sensitive information or relationships developed in the course of business. This is particular important in cases where business are looking to protect trade secrets. To claim a trade secret violation, businesses must show that information being protected by the agreement was not generally well known and that the business took reasonable efforts to maintain the information’s secret. This means if a company fails to implement internal policies to protect sensitive information, including trade secrets, it may undermine its own ability to enforce a non-compete or non-solicitation agreement.
Finally, businesses using or considering using these agreements should adopt policies and procedures to routinely review their agreements. As the regulatory and legal environment in which business operate change, employers should take the time to review their agreements with counsel to make sure that their agreements are valid and enforceable under the current law. Failure to make regular compliance checks can result in the waste of significant up-front time and effort if provisions previously thought to be compliance with the law are later determined to be too severe or vaguely drafted.
- Be Strategic
Non-compete and non-solicitation agreements are not one-size-fits-all contracts. Restrictions on the right to work are disfavored. As a result, when courts review non-competition or non-solicitation agreements, they look to the legitimate business interests that the agreement purports to protect. When employers use the same boilerplate language and terms for non-competition and non-solicitation agreements with all of their employees, regardless of an employee’s actual duties or criticalness of the employee’s function to protected business interest, the disfavored status of the agreement places the employer at an automatic disadvantage in ensuing litigation.
Employers who take the time to adopt policies and procedures to enforce these agreements effectively do themselves a favor when they ensure that their agreements are drafted strategically. Strategically drafted agreement weigh a number of factors such as (1) what actual services, roles or functions did the employee serve during employment, (2) what skills or knowledge did the employee gain through employment that would be damaging if used against the employer, and (3) what is the nature of the industry in which the employer and employee were operating. The business value, or detriment, posed by an employee when analyzed through factors like those listed here help define the legitimate business interest that the law is willing to protect through agreements like non-competes and non-solicitations. Accordingly, employers should be strategic by conferring with counsel when drafting non-competes and non-solicitation agreements to make sure that the terms of the agreement meet the strategic needs of the business that the agreements intend to protect.
- Be Reasonable
Reasonableness is the touchstone for an enforceable non-compete or non-solicitation agreement. If a court decides that the provisions of such an agreement are unreasonable, the provisions are unenforceable as a matter of law. Reasonableness of an agreement focuses on the geographical scope of the agreement as well as the amount of time that an employee is prohibited from competing or soliciting. Although these determinations are made on a case-by-case basis, courts have provided a number of considerations that employers should consider when implementing these agreements.
Some rules are more flexible than others. For example, courts will consider time and geography on a scale together when determining reasonableness. Thus, a longer time period is acceptable where the geographical restriction is relatively small and vice versa. For geography, courts will also review materials through a balancing of factors including: (1) the area of the restriction, (2) the area assigned to the employee, (3) the area where the employee actually worked or was subject to work, (4) the area in which the employer operated, (5) the nature of the business involved, and (6) the nature of the employee’s duty and his knowledge of the employer’s business operation.
On the other hand, there are some hard and fast rules. For example, five years is considered the “outer boundary” of reasonableness. Moreover, where an agreement accounts for time served during employment, called a “look-back” period, courts will add such time to the length of the actual restrictions to determine the actual time-length of the agreement.
When employers go too far while trying to protect their business interests, they can put their business interest at further risk by having created an unreasonable, and unenforceable, agreement. Employers should work with counsel, making every effort to review the nature of their business, the interests at risk, and risks posed by particular classes of employees in order to draft an agreement that courts will likely find reasonable should they be asked to enforce it.
Our team has experience preparing and litigating these agreements. We can help businesses and employers effectively use non-competition and non-solicitation agreements to protect their business interests in a market place with an ever-changing work-force in ever-evolving industries where knowledge and information make the difference in your business success.