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Use Noncompete Agreements To Help Protect Your Business From
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By Tim Knox
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Q: One of my former employees has started a competing businessand is calling my clients and trying to steal their businessfrom me. Do I have any legal recourse against him? -- Brad J.
A: I hate to break this to you, Brad, but unless this formeremployee signed a noncompete agreement while on your payroll,there is probably very little you can do to stop him from wooingyour customers. You should discuss the situation with yourattorney, but unless this person is also breaking the law insome other way (using stolen trade secrets, for example) yourattorney will probably concur with me.
Renegade former employees riding the free enterprise wave is onereason noncompete agreements are gaining in popularity amongemployers who hope to use them to help protect their businessfrom competitive threats launched by former employees. Manyemployers are now demanding that key employees sign noncompetesas a stipulation of employment. While signing noncompetesusually doesn't sit well with employees who view them aspotential roadblocks to their upwardly mobile career path, manybusinesses will not hire a key employee without his or hersignature on the dotted line.
A noncompete agreement is a formal contract between you and youremployees in which they promise not to use information orcontacts pertinent to your business in a competing situation. Inother words, they agree not to take everything they learnworking for you and put it to use for someone else. This couldmean going to work for a competitor or starting a competingbusiness of their own.
While not popular with employees, noncompete agreements are agood way for employers to keep key employees on the payroll andprotect the company's proprietary information. That said, do notgo overboard with noncompetes: not every employee should berequired to sign one. If an employee does not have access tosensitive information, customer or accounting data, or isintegral to the overall success of your business, there is noneed to have them sign a noncompete. The janitor, for example,poses very little threat to your business if he gets a job witha competitor. Your sales manager, on the other hand, candevastate your business by hooking his wagon to a competinghorse.
Which employees should sign noncompete agreements? While theprerequisites vary from business to business, the following is agood general list. The term "employees" represents executivelevel, management, supervisory, and non-management personnelrelative to that example:
- Employees involved in research or product development. -Employees involved in the design, fabrication, engineering, andmanufacturing process. - Employees who service products made andsold by your company. - Sales and service employees who haveregular contact with customers or sensitive customerinformation. - Employees with access to sensitive businessinformation or trade secrets. - Most importantly, employees whohave sufficient information about your business that would allowthem to start a competing business.
Most business experts agree that noncompete agreements aregenerally a good way to protect your business. The downside isthat noncompete agreements are often difficult to enforce and insome states, may not be enforceable at all. Many state courtshave ruled that noncompete agreements are too restrictive on anemployee's right to earn a living.
In California, for instance, noncompetes are generally onlyenforceable in connection with the sale of a business and notfor employees. In Alabama, noncompetes are generally enforceablein only two contexts: the sale of a business and in connectionwith employment - but even then the enforcement requires thatthere be a valid interest worthy of protection.
Some states require that the noncompete be signed at thebeginning of the employment relationship and will only considerthe enforcement of a noncompete signed after the initialemployment date if the signing of the noncompete was accompaniedby a promotion, raise in pay, or other event that elevated theemployee to a more important role within the company.
To be enforceable, noncompete agreements must be reasonable onthree accounts: Time, geography and scope. Regarding time, youcan't restrict someone from competing with you forever, so oneto three years is the accepted time period for most noncompetes.
As to geography, you can enforce restriction in the general areawhere you conduct business, but you can not enforce therestriction beyond those boundaries. And for scope, theagreement can restrict certain actions on the part of theemployee, but can't be so generally restrictive that theemployee won't be able to earn a living working in the sameindustry in a noncompetitive position.
One interesting thing to note: noncompete agreements are notenforceable against certain "professionals," like doctors, CPAs,and lawyers (who do you think writes all those noncompetes).
At this point, Brad, the best thing you can do is contact yourattorney to see if you have other grounds for suit, then contactyour customers and let them know what's going on.
Explain the situation regarding the former employee, but do socalmly and resist the urge to tell them what you really think ofthis guy. Showing your anger to the customer is not going tohelp you keep their business .
Reaffirm your relationship with the client, tell him how muchyou value his business, remind him of your track record andlevel of service, then ask one simple question: What can I do tomake sure your business stays with me?
Here's to your success!
Tim Knox tim@dropshipwholesale.net For information on startingyour own online or eBay business, visithttp://www.dropshipwholesale.net
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