The Green Sheet Online Edition
November 23, 2009 • Issue 09:11:02
Protect your investment through non-competition agreements
After spending great amounts of time and money training a new industry entrant, it's natural for a business owner to want to protect that investment. At the same time, it is now increasingly common for sales agents to move from company to company, picking up industry expertise and confidential information along the way.
To balance these competing interests, parties have turned to using non-competition and non-solicitation clauses in their employment or agency agreements that define the boundaries and limitations of the employment relationship from the start.
Lately, my firm has been asked to interpret a greater number of employment contracts containing these clauses, as they have become more common in the payments industry. This article provides a quick primer on these subjects, as well as suggestions on how to protect your assets and confidential information.
Typically, non-competition and non-solicitation clauses are found in employment and independent agent agreements, which are usually signed at the beginning of the employment relationship.
The non-competition clause restricts the employee or agent from engaging in specific activity within a certain geographic area for a specified time after termination of the employment contract, typically regardless of the termination's cause.
Not to be confused with a true non-competition clause, a non-solicitation clause restricts the employee or agent from contacting, contracting with or soliciting the former employer's merchants, customers or remaining employees within a certain geographic area for a specified time after termination of the employment contract.
The laws covering non-competition and non-solicitation are governed by individual states. There is simply no way to analyze the enforceability of an employment agreement without reviewing the specific terms of each agreement and knowing the choice of law contained in each.
There can be divergent results from state to state. For example, in some states non-competition agreements are enforceable if they pass scrutiny when reviewed under tests of reasonableness or fairness. In California, however, non-competition agreements are generally unenforceable, subject to a list of exceptions to this general rule.
In addition, deciding whether merchant lists constitute trade secrets or confidential information is a fact-driven endeavor and varies from state to state. In analyzing this issue, courts often consider how the information was treated by the parties.
For example, did the applicable agreement require that the information be kept confidential - even from other employees? How well guarded did the "owner" keep the information from third parties, affiliates and non-essential employees?
On the other hand, general information learned by an employee or agent through the course of employment or engagement is typically not protected, and courts will usually analyze whether restrictive covenants protect legitimate business interests.
As a business owner, you should perform additional due diligence if you are thinking about hiring an individual who was previously employed by a competitor, especially if you know the individual was bound by a non-competition clause. Because you were not a party to the previous employment agreement, the former employer likely would not have a claim against you for breach of contract.
However, it is possible the former employer could raise claims of contract interference for your actions in persuading said employee to breach his or her agreement with the former employer, particularly if you were aware of the agreement prior to hiring the individual.
In addition, you could face other claims, such as allegations of theft or misappropriation of trade secrets and confidential information, unfair competition, conversion, interference with business relationships, unjust enrichment, and civil conspiracy.
If you hire the employee and, while under your employ, the individual solicits the former employer's merchants or clients, the former employer could seek injunctive relief against you to prevent you from soliciting said employer's customers and from using information you may have received from the new employee. Additionally, the former employer could seek monetary damages caused by lost profits.
Remember that even if you are "successful" in defending a lawsuit filed against you, you have still been forced to spend your hard-earned money defending the action, which is reason enough to clarify these issues before actually hiring the employee.
Employee and agent recommendations
If you are an employee considering leaving your current employer but still want to remain in the industry, closely review your employment contract for non-competition and non-solicitation restrictions. If you are bound by such restrictions, analyze both what the contract's limitations are and whether applicable state law will uphold
Using restrictive clauses
If you are considering hiring a person and would like to have him or her bound by a non-competition or non-solicitation agreement, here are two simple steps to follow:
1. When drafting the employment agreement, be clear about how long, where and how you want to restrict the employee from competing with you after termination of employment.
2. Discuss those limitations with the attorney drafting the agreement to decide which state's laws should apply. This is an important consideration because, as stated earlier in this article, whether the limitations you choose are enforceable against a former employee is decided under state law. Courts generally honor parties' choice of law so long as the chosen state has some relationship to the parties or transaction or if there is a reasonable basis for the choice of law.
While well-drafted non-competition and non-solicitation clauses can help protect reasonable expectations of both employee and employer, actually preparing the terms of clauses is a delicate balancing act.
If the provisions are too restrictive, they will not be enforced by the court; if the provisions are not restrictive enough, they will be ineffective and possibly not worth the time or money required to negotiate them.
Following this advice and using qualified help will assure that your assets will be protected for years to come.
The recommendations herein are general suggestions; they are not a substitute for legal advice. For specific information, consult experienced legal counsel. Sarah Weston is an attorney at Jaffe, Raitt, Heuer & Weiss PC and advises businesses on contract and regulatory issues in the merchant acquiring, stored value, automated clearing house and payment systems industries. You can reach her at 248-351-3000 or at