Ways to protect your company from inside competitors.
You can't keep key employees from leaving, but you can try to limit what they take with them
It's in the very fabric of American business for people to leave one company and start a competing one. Many of our most successful corporations, such as IBM, Amdahl, and Intel, were built by mavericks who went out on their own. You may well have done the same thing yourself. Still, it can be pretty unsettling when you think about your own key employees taking this route, particularly in service businesses in which employees are the principal corporate asset. When can they do it? What can they take with them? Can they solicit your customers? How can you protect yourself?
There are legal limits to how a former employee may compete with you, but, frankly, litigation is seldom the answer. Your best protection is to make your company so appealing that few will want to leave. This means providing the most attractive possible compensation package, working conditions, opportunities for advancement, and so on.
The courts recognize that there is a certain degree of loyalty your employees owe you. They look askance, for instance, at people competing with you when they are still on your payroll. Employees can't legally use your office supplies, telephones, or anything else to promote their own enterprises. Nor can they solicit your customers for a planned venture while still on your payroll.
But even here you shouldn't count on an easy time in court, as the ABC Trans National Transport case demonstrates. President of ABC Robert Agnes, frustrated because its owner refused to reinvest profits in the company, made plans to start his own company, Aeronautics Forwarders Inc. Most of ABC's regional sales vice-presidents and more than half the employees of its major offices agreed to join Aeronautics. While still employees of ABC, they asked its exclusive carting agent in the Los Angeles market to take on business for Aeronautics. They bought shipping containers for Aeronautics and billed them to ABC. They even used ABC's office machines to address Aeronautics's airbills. To convince employees to go with Aeronautics instead of ABC, they claimed ABC would become an empty shell after the key people left. Later, they offered inducements to help shift accounts away from ABC. During its first year in operation, at least $6 million in Aeronautics revenues came from former ABC customers.
ABC sued, asking for $3 million in losses plus $2 million in punitive damages. It also asked for a court injunction that would prohibit Aeronautics from doing business with its principal customers.
ABC won -- sort of. The court agreed that Agnes and his associates breached their fiduciary duties by promoting Aeronautics's interests while still ABC employees, and branded their efforts an illegal conspiracy. Collecting a big award proved tougher, however. ABC got only $255,000. The air-courier business is volatile, the court reasoned, and it's common for customers to switch vendors. Moreover, the court refused to issue an injunction barring Aeronautics from doing business with ABC customers since ABC hadn't suffered irreparable harm. (By the time the case came to court, ABC was once again profitable.) In other cases, former employees have been held liable for lost profits when their misrepresentations have caused a business to suffer losses. This is true whether or not they were on the payroll at the time.
As the ABC example shows, courts generally are on the side of increasing competition, not stifling it, so the techniques available to you to protect your company, your customer lists, and other confidential information are few and are by no means ironclad. They are, however, worth considering.* * *
* Noncompete agreements. Most courts recognize two legitimate reasons for an employer to make noncompete agreements with employees.
One is to protect customer contacts and relationships, and the other is to protect confidential information. Courts won't uphold noncompete agreements whose primary purpose is to quash competition.
A noncompete agreement also has to be limited in time. If it's customer contacts you're trying to protect, your agreement should run only as long as it would take a new employee to prove his or her competence. If you're interested in protecting confidential information, your agreement should remain in effect only as long as the information could give your new competitor an unfair advantage. In many industries, two years would be considered the outside time limit for a reasonable noncompetition agreement.
These agreements should also be limited in the geographic area they cover. Depending on how your business operates, you might ask that an employee not compete with you on a particular route, or in a particular city, county, or state.
If you decide that you need noncompete agreements, it's a good idea to use them sparingly. Require them mainly of key employees -- certain salespeople, say, or managers, engineers, and designers -- and tailor restrictions to reflect each situation. Otherwise, a court may suspect that your aim is to stifle competition in general. State laws often limit how employers may use noncompete agreements, so it's a good idea to check local laws for any restrictions (see below).* * *
* Protecting confidential data. You can gain legal protection only if the information is really confidential, that is, unavailable from outside sources. Furthermore, you must treat it as confidential. This means identifying it as confidential and restricting employee access to those who have a legitimate need to know.
While you don't need a written agreement to protect your confidential information, it's a good idea to require employees to sign one. This will make it easier to demonstrate that your employees understand their obligation to safeguard this material.
Such procedures may seem like needless bureaucracy, but that doesn't have to be the case if you make them part of a program that emphasizes the value of your company's information assets and the need to protect them from outsiders.* * *
* Protecting customer lists. This may be a little trickier. If your customer list is one that you've compiled at considerable expense, or if it's a tested list that produces demonstrated results, you may be entitled to protect it as you do your other confidential business information. A court, for instance, may prohibit former employees from soliciting people on the list.
But if your customer list is of a more general variety, easily compiled from public sources, courts will probably accord it less protection. In this case, while departing employees can't take your list, they can solicit any customers they recall.
To gain maximum protection, again, you should put into effect security procedures that emphasize the confidential nature of your list -- by stamping it "confidential," for example, and restricting access.* * *
If you're faced with losing key employees, review with them any confidential material they've had access to in the course of their work, and ask them to return any still in their possession. You should also review with them their obligations under any noncompete and nondisclosure agreements. Losing a key employee hurts, of course, but it's another aspect of the free choice that enables each of us to pursue our ambitions.
Marisa Manley is an attorney in New York City.
STATES WITH STATUTES LIMITING NONCOMPETE AGREEMENTS
State Limits on agreements
Alabama Prohibits noncompete agreements with independent contractors
Colorado Noncompete agreements may be applied only to high-level staff
Florida Agreement must be for a reasonable time and within a reasonable geographic area
Hawaii Allows noncompete agreements only for prohibiting use of trade secrets
Louisiana Allows noncompete agreements only if employer incurs special expense in advertising or training employee; maximum duration of two years
Montana Prohibits noncompete agreements
Nevada Prohibits noncompete agreements
North Dakota Prohibits noncompete agreements
Oklahoma Prohibits noncompete agreements
Oregon Noncompete agreements allowed only if agreed upon at beginning of employment relationship
South Dakota Allows noncompete agreements only between licensed professionals. Maximum time limit is 10 years; maximum territory is 25-mile radius.
Wisconsin Prohibits partial enforcement of overly broad noncompete agreements -- those that apply to too large a geographic area, for instance, are too long in duration, or cover information that is not truly confidential
Be sure to check the state laws where you do business since these laws are ever changing. Court cases, too, may substantially limit how noncompete agreements may be used.
Source: Drake Law Review, Vol. 35, 1985-86 n