Think All Noncompetes Stink?

Of course, there's a bit of irony here: PSS might not exist today if Kelly's previous employer had used noncompetes. "Now I'm their worst nightmare," Kelly crows.

Indeed, many of the companies that grace this magazine's pages might not be around were it not for the absence of noncompete agreements. For example, Leza Raffel freely admits that she launched Communication Solutions Group Inc., a $270,000 public-relations agency in Jenkintown, Pa., by walking out of her job and taking three clients with her. To prevent the same thing from happening at her company, Raffel says, she requires every employee to sign a noncompete agreement. But she wouldn't want to do the same. "I would never sign one of those things," she says.

Cut back to Mark Moses. It's January 1997, and Moses believes he's learned his noncompete lesson. He says he has brought in a new management team and has fully recovered from last year's departures. Partly to instill a sense of ownership, he says he's given the four new managers a combined 17.5% of the company. But Moses has another reason, too--and it's the California policy of recognizing noncompetes only for shareholders. Not surprisingly, Moses has included a noncompete clause in the shareholders' agreement that his new managers have signed. And if any shareholder leaves while the company is private, the value of his or her stock will take a 20% "haircut," and Moses can buy back the rest over three years. "I want their heads vested in the long-term future of my company," he says. "We plan to go public soon. This stock will be worth a lot of money some day."

Sure. If they stay.

Christopher Caggiano is a staff writer at Inc.

Jargon: Noncompete-Speak

There's no getting around it: crafting a solid noncompete means working closely with a good lawyer. Here's our translation of some of the most common legal terms you'll encounter:

Noncompete agreement. A noncompete attempts to restrict, for a certain length of time, an employee's ability to leave to work for a competitor, steal your clients, or set up a competing business. You can't completely prevent employees from defecting to--or becoming--the enemy, but you can make them wait for the privilege.

Nonsolicitation agreement. A close relative of the noncompete, this document restricts an employee's ability to pilfer clients or lure away coworkers.

Trade secrets. This term refers to confidential--especially technical--business information. Trade secrets can also include a company's future plans, manufacturing process, or pricing structure. Customer lists are not automatically covered, but the more proprietary information they contain (for example, contact names, price quotes, contract expiration dates), the more likely it is that you'll be able to protect them.

Nondisclosure agreement. This document specifies that your employees will not use your "trade secrets" to benefit anyone but you.

Duty of loyalty. Even without any signed agreements, the law prohibits employees from certain activities while still on your payroll. The law varies from state to state, but forbidden activities can include running a competing business, working for the competition, misappropriating confidential information, soliciting your customers, and recruiting your employees to join a competing firm. Your employees generally can, however, announce their venture publicly (in some states, even using your customer list), lease office space for a new business, and form a corporation.

Now what? Agreements That Stick

No noncompete is ironclad; you'll always be at the mercy of a judge. But there are steps you can take to greatly increase the odds of successfully enforcing an agreement.

Research your state's laws. Many states--including California, Florida, and Texas--limit noncompete enforcement. If you're in a state hostile to noncompetes, consider alternatives, too. (See "Noncompete Variations," below.) Otherwise, you may want to specify in your agreement that disputes must be litigated in your home state, to avoid the vicissitudes of trying a case in an unfamiliar judicial environment.

Get specific. Lawyers argue convincingly (if self-servingly) that you can't just copy a boilerplate noncompete clause from a book and expect it to apply to your specific case. According to David Barmak, a lawyer at Sherman Meehan Curtin & Ain, headquartered in Washington, D.C., a one-size-fits-all, lowest-common-denominator approach may be enforceable, "but it probably won't be worth enforcing."

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