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."
Don't overreach. If you're out to bar employees from any competitive activity beyond your hallowed halls, remember this: the more restrictive the agreement, the harder it normally is to enforce. Mel Jager, a lawyer at Brinks Hofer Gilson & Lione, based in Chicago, recommends that you keep your agreement limited and precise. The time frame should generally be no longer than one to two years. Geographic restrictions should be reasonable, given your industry and the employee's responsibilities (although computers, E-mail, and the Internet have in many situations made geographic restrictions moot).
Give something in exchange. To make a noncompete stick, you have to give the signer something in return. How much is enough? State laws vary considerably, so consult a knowledgeable lawyer. Usually, it's OK to ask new hires to sign a noncompete as a condition of employment. But when you're asking a current employee to sign one retroactively, you may have to cough up something more, such as a promotion or a bonus.
Handle your trade secrets with care. If you want to convince the courts that certain information is a trade secret, you have to treat it as such in your business. Keep confidential information in a secure place, give employees access to it only on a need-to-know basis, and establish a written sign-out procedure. Let your employees know what information is classified; remind departing employees during exit interviews about what they must physically and psychically leave behind.
Check new hires for outstanding agreements. Even if you don't use noncompetes, remember that many companies do. Anil Khosla, a lawyer at Peabody & Arnold, based in Boston, recommends having new employees sign a statement declaring that they are not under a conflicting noncompete clause with another company. If you find out that a recent hire has violated an agreement with another company, he suggests you treat the matter seriously.
Options: Noncompete Variations
Maybe the notion of companywide noncompete agreements leaves you cold or you work in a state hostile to them. You could still...
Target only employees who are shareholders. Judith Nitsch of Judith Nitsch Engineering Inc., a $3.5-million civil-engineering firm in Boston, uses noncompetes only in her shareholders' agreements. In addition, shareholders who are fired or who quit must wait a year before the company will start to buy back their stock. "They can start a competing business, but not with my money," says Nitsch.
Make a noncompete part of a severance deal. If you continue to pay a departing employee for a certain period of time, you may make any accompanying noncompete agreement more enforceable. "You're basically paying a former employee to stay out of the workforce," says Anil Khosla, a lawyer at Peabody & Arnold, based in Boston.
Try another tack entirely. Gary Bitner, president of Bitner.com, a marketing and communications company in Fort Lauderdale, Fla., believes that requiring employees to sign noncompetes sets the wrong tone. "They're hard to make work in Florida, anyway," he says. So as part of his client agreement, Bitner asks customers not to hire or do business with a former employee for a year after the employee leaves.
Resouces
For a plain-English primer on employment legal matters, including noncompete agreements, check out The Employer's Legal Handbook 1.2, second edition (Nolo Press, 800-992-6656, 1997, $29.95). Similarly helpful is Stay Out of Court: The Manager's Guide to Preventing Employee Lawsuits, by Rita Risser (Prentice Hall, 800-447-7700, 1993, $19.95).
Sometimes it's useful in a negotiation to know how "the opposition" is thinking. Perks and Parachutes: Negotiating Your Best Possible Employment Deal, from Salary and Bonus to Benefits and Protection, by John J. Tarrant and Paul Fargis (Random House, 800-726-0600, 1997, $25), discusses employment issues from a worker's perspective. It's kind of like having the other side's playbook.
