Should Employees Sign a Non-Compete Agreement?



There’s an old adage that says, "knowledge is power." This has never been more true than in this age of information, when companies increasingly value, manage, and leverage their knowledge assets. Today, it behooves all businesses to protect any knowledge they possess, and try to prevent it from walking out the door. One of the ways this can happen is when an employee leaves the business, sometimes taking valuable knowledge with them.

There are many tools businesses can employ to protect the information they have acquired. One of the most important legal options is the non-compete agreement. Non-compete agreements are legal contracts between employees and employers that govern what company information can or can’t be used by current or former employees.

The non-compete agreement has become especially popular in this era of knowledge-sensitive high-tech firms. Lawsuits over proprietary technical information are reportedly at an all-time high in areas such as Silicon Valley. The combination of a strong job market and an attitude in some companies that makes employees feel as if they’re dispensable commodities has often led to very weak worker loyalty. Non-compete agreements are often seen as a response to this problem.

A non-compete agreement doesn’t have to pertain only to high-tech firms. Non-compete agreements can be equally useful for any business that has a customer list. After all, if your best salesman or producer leaves your company and is allowed to take his or her account list, you could be in for trouble.

Non-compete agreement should also not be seen solely as protecting the rights of employers over employees. In truth, well-written agreements clarify the rights of both sides and can prevent costly lawsuits.

There are four types of non-compete agreements restricting employees’ use of company information:

The classic non-competition agreement. These agreements typically prohibit an employee from working for the competitor of the employer, or from competing with the employer once he or she ceases employment. The benefit of this agreement to the employer is that it prevents employees from using acquired information for the benefit of a competitor. It is best used when the employee will have access to sensitive information.

Non-solicitation agreements. This typically prevents former employees from soliciting, contracting or transacting business with the employer’s existing customers. It is used to prevent employees who are leaving from taking the clients of the former employer with them.

Non-disclosure agreements. This type of contract prevents employees from using their former employer’s trade secrets, proprietary information and/or confidential business information, or disclosing this information to third parties, or disclosing trade secrets to competitors or for a competitor’s benefit.

Confidentiality agreements. This informs the employee that the employer intends to keep certain information confidential. It is similar to a non-disclosure agreement, except that it works both ways: the non-disclosure tells a former employee that he or she can’t give competitors confidential information; the confidentiality agreement says that you as the employer must also keep the information to yourself.

Of course, it’s not enough for both sides to simply negotiate and sign a piece of paper on the subject of confidentiality. When drafting a non-compete agreement, you need to include certain important facts. Unless the various sections are properly drafted, they won’t be enforceable in the courts. In fact, the courts have made very specific rulings about what types of information are protectable under such agreements. They include customer lists, product requirements, and needs or preferences.

When drafting a non-compete agreement, there are several areas to consider. First, identify your objectives. Ask yourself what you are trying to accomplish through the agreement. Some examples include: keeping information confidential, trying to prevent increased competition, or barring former employees or your competition from soliciting your clients.

Identify the scope of the restriction. For example, if you are in the computer business, are you trying to protect information about software or hardware? The non-compete cannot be too broad as to cover areas not applicable to the employer. Be sure to determine if the type of information you are protecting is something that could truly jeopardize your company if it got out.

Identify the time duration. Like it or not, you cannot protect some business secrets forever. At some point even your best information may become stale and you won’t be able to sue over its loss.

Consider the penalties for violating the agreement. Penalties can include injunctions or monetary damages. These may vary according to the jurisdiction you are under. California tends to be very strict on non-compete agreements, but other jurisdictions are more lax in enforcement.

Consider your existing employees. You may want to include a clause about protecting your current employees from being raided by former employees looking to take over your business.

As with most legal matters, it is important to remember that non-competition agreements work best as preventive medicine. A properly drafted contract can protect you from painful and costly legal action in the future.

Although non-compete agreements don’t require an attorney to draft them, they do require specific knowledge of this particular area of law. In most cases, you will want a legal professional to draft the agreement for you. This is for your benefit, as a knowledgeable lawyer can close damaging loopholes, providing you with an air-tight contract most beneficial to you and your business.

This article was authored by Sanford Michelman, a member of the California Bar, who is associated with the Law Firm of Michelman & Robinson, LLP, with an office in Sherman Oaks, California.

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