fig® - Downtown Lancaster

Understanding Non-Compete Agreements

Most business owners have at some time been told that they should have a “non-compete agreement” or a non-solicit agreement or some type of confidentiality agreement in place with their key employees.  The purpose of such provisions can be easily illustrated by the following questions:  If your head salesman left tomorrow and started his own business in your same industry, would your sales suffer?  If your chief financial officer was hired by your competitor and took 3 of your 10 employees with him, would it be difficult to run your business as usual the next day?  If your sous chef went to a new restaurant and divulged the recipe for the top-selling dish that packs in patrons, would your restaurant lose some of its draw?

These type of questions are enough to keep any business owner up a night because the answer is generally yes.  Getting key employees to agree to provisions such as non-competes, non-solicits and confidentiality agreements is a good way to alleviate these concerns.  All three may be appropriate or one or more.  For this blog, the importance is to understand the difference between the three provisions.

A non-competition agreement generally states a period of time and a geographic area in which the departing employee cannot own or be employed by a competing business.  So, for example, if you are a distributor of dry ingredients for food manufacturers in the Mid-Atlantic region, the non-competition provision may restrict a departing salesperson from starting his own (or working for another) competing  distributing business in the Mid-Atlantic region for 1 year from the date he leaves your company.

A non-solicitation agreement generally states a period of time during which an individual can not solicit the business of any customer or referral source or solicit (and sometimes hire) any of your employees.  Generally, this provision will prohibit not only doing work for such customers and referral sources and/or soliciting any such employees but also attempting to get the work of the clients and referral sources and/or lure away your employees.  The idea is that if you can put some time between when the employee leaves and when he can start soliciting customers, referral sources and employees, the weaker the relationship between the departed employee and those individuals and the lower the likelihood they will be persuaded to follow him to his new employer.

A confidentiality/non-disclosure agreement generally prohibits the departing employee from disclosing confidential information that, if made available to your competitors, could be used to your detriment.  It could protect information such as processes, customer lists, supplier lists, financial information, or, in the case of the sous chef example, the recipe to your top-selling dish.

All three restrictions are important if a business owner is trying to fully protect his interests in the event of an employee departure.  Of course, as with any legal document, just writing these terms on a piece of paper and getting it signed by the employee will not necessarily make these terms legally enforceable.  Because of the way non-compete agreements interfere with an individual’s right to earn a living, the courts are particularly strict as to what non-compete provisions they will enforce.  Please check back for next month’s post, where I will discuss the law on how you can ensure your employees’ Non-Competition, Non-Solicitation & Confidentiality/Non-Disclosure Agreements are enforceable.

Thanks to Dara Bachman, one of our associates, for helping with this blog.

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