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Hey! You can't compete with me!
I just fired you! 

Your business has been humming along, doing great, in fact… that is, except for Joe. Joe is one of your salesmen, and he just isn't performing. It's not like he hasn't been warned. You've worked with him, but it just hasn't worked out. He's performing so badly, that you have to let him go.

You're not worried about it. You were smart enough to get him to sign a non-compete agreement when he started work. So you fire him. Next week, he's working at your primary competitor, specifically against the non-compete agreement he signed. Worse, he seems to be contacting your customers!

Can you sue? If you sue, will you win?

What is a non-compete agreement?

A non-compete agreement (or confidentiality clause in the employment contract) tries to protect your company's competitive edge by preventing employees from taking your hard-won proprietary information and using it against you. But, to be enforceable, your agreement needs to be limited in scope, geographical area, and time. If the courts feel that the agreement is unreasonably limiting, the agreement can be thrown out.

Before we launch into the primary parts of a non-compete agreement, let's look at how the courts view these agreements. The courts in general try to balance your right to protect your trade secrets with the employee's right to make a living. That doesn't mean that the employee can use your trade secrets against you, but that also means that you cannot prevent the employee from using his skills and talents to earn a living after he's left your company.

Scope includes the items that are to be covered by the agreement. This can mean procedures, engineering techniques, client or customer lists, or other information that is vital to the operation of your company. You must be careful about defining the scope. If the information you are trying to protect is general knowledge in the industry, or is not restricted to certain employees in the company, the agreement might be thrown out. For instance, if you are a software firm and you train an employee to use Microsoft Visual Basic, you cannot restrict his use of that knowledge after he leaves your firm. Why? Because that knowledge is generally known in the industry. However, if that employee has used that knowledge to write a computer program that is vital to your competitive edge, he cannot take the source code with him. The source code is not generally known in the industry, and may be covered by the definition of a "trade secret" (more on that later).

On the other hand, if you have a salesman who takes the business cards he's collected over the last 6 years, quits, and starts a competing business just down the street from yours, you very well may prevent him from using those names. The information is restricted and is not readily apparent to others in the industry, and your company had spent considerable time acquiring those names.

Geographical area is just what it sounds like. Again, you must be careful about limiting the area so the courts do not feel that the area is unreasonable. The exact area may depend on where your company is located. In some places, a distance of 300 miles from your company may be reasonable, where in others 100 miles is unreasonable. When you develop your agreement, you might state area in terms of customers instead of physical distance. For instance, you might limit the agreement to the top 50% of your customers, or name specific customers. The advantage to this is that it allows the ex-employee to practice their profession while at the same time protecting your business. Be careful about limiting this - if you say 100% of your customers, the courts may feel you are unreasonable for trying to protect your $100/year customer as well as your $2,000,000/year customer.

Finally, time is just what it sounds like. There must be a limit in time to the agreement. While time periods of 1 year are usually considered reasonable, time periods over 2 years are rarely supported.

Sign the paper, old man…

Who in your organization should sign a non-compete agreement? It used to be that only top-level executives in the company needed to sign non-compete agreements, since they were the only ones that had access to information vital enough to be considered "confidential". Of course, these days we are trying to "empower the employees", and that power is knowledge. Employees at all levels of your company may have access to information that only recently was reserved for the "nosebleed" section of management.

Of course, technical personnel have long been required to sign nondisclosure agreements. However, it's not enough to just get them to sign the agreement. Trade secrets require some work on the company's part. You must also actively protect the information generated, taking reasonable measures to keep it secret. Also, you must be able to show that your company derives value from the secret and from the fact that your competition does not know the secret.

Thus, our earlier example of the Basic programmer runs into the trade secret issue. If the employee has signed a nondisclosure agreement, and if your company had actively reminded this (and all other associated employees) of the "trade secret" status of the code, you probably will have a very good case against the employee taking the source code.

In this case, you need to be careful about what you call a "trade secret". If you put something into the company newsletter, you can't really call it a trade secret. Trade secrets must be restricted to some small portion of the company. In most cases the entire company cannot know the "secret".

Okay, so can I fire the guy?

So now we return back to our first example. Should you have fired Joe? Does the non-compete agreement hold?

Maybe yes, and maybe no. The courts have ruled that by terminating an employee, you may void the non-compete agreement. After all, if the employee was not worth keeping, why is he a threat to you?

That doesn't mean he can take trade secrets with him. But you may not be able to prevent him from working for your competition. You may need to take solace in the hope that in leaving your company and joining your competition, the net IQ of both companies has just been raised.

However, if you haven't yet fired Joe, you may want to consider retraining him for a different position. It may be cheaper than litigation. Unless, of course, the guy is a complete idiot.

Caveat emptor

As with all articles on points of law, you should always consult a practicing attorney on any agreement you intend to have employees sign (or any legal agreement or contract, period). In particular, each state has different laws controlling this type of agreement, so don't assume you can make "one agreement fit all" from state to state.

-Kris & Stu Bell