“Win With Noncompete Agreements”

In today’s fast-paced, aggressive marketplace, you must protect the resources that have enabled your business to thrive. One way to shield these assets is through a noncompetition agreement.

Noncompetition agreements are routine in the sale of a business — the buyer wants to preserve the value of an ongoing enterprise by restraining the seller from engaging in a competing venture.

But things get murkier with noncompetition agreements with employees. Without such an accord, a departing employee can compete against you and take preliminary steps to do so while still in your employ. On the other hand, an employee must be allowed to earn a living, and competition benefits the public and drives companies to succeed.

Some states, such as California, prohibit employer/employee covenants not to compete on public policy grounds as an unfair restraint of trade. Others permit them if the restrictions are narrowly defined and reasonable. Massachusetts is among those states that will not apply noncompetition contracts to service professions. Consult a lawyer to determine how your state regards these pacts and to draft a noncompetition agreement that will be enforceable.

What to Protect and How

Only legitimate business interests may be shielded by a noncompetition agreement. Those interests include:

• Goodwill generated by your name, location and reputation.
• Confidential business information, such as customer lists.
• Trade secrets such as a chemical formula, manufacturing process or computer software not widely known in the industry.

The nature of your business and the position held by the employee are among criteria used to measure whether a noncompete pact is reasonable. Other factors:

• Geographic area in which competition is forbidden.
• Time interval of the agreement.
• Type of competition prohibited.
• Consideration for the agreement.
• Whether the agreement creates undue hardship on the employee.
• Whether the agreement is contrary to the public interest.

Reasonableness is decided on a case-by-case basis. Most courts will not uphold an agreement that restricts the employee for more than two or three years. Geographic limitations must be narrow in scope and not beyond the market area of your business. Restrictions may encompass a 100-mile radius from your business or your home state. However, high-tech companies that market products nationwide may secure a restraint that covers the United States.

An important criterion is the value received by the employee in return for signing the noncompetition accord. The consideration may involve a bonus, salary hike or severance package. Some states view continued employment as the value received by the worker for accepting the pact. Because noncompetition contracts are drafted by employers, any ambiguity in the agreement is construed against the employer. An employee with highly specialized skills that render him or her unemployable in another field will likely be permitted to compete irrespective of the agreement.

How Are They Enforced?

Sometimes the agreement contains a damages provision that represents a fair forecast of your economic loss, but is not meant to penalize your former worker or his or her new employer. In some instances in which an employee has breached a noncompetition pact, the court has extended the time period during which the worker may not compete against the former employer, or the worker forfeits compensation otherwise due.

It’s good practice to send letters to departing employees reminding them of the noncompetition agreement and to have them acknowledge it in writing.

Writer: Sheldon C. Toplitt is a legal journalist and attorney concentrating in employment law and communications law in Needham, Mass.