How to help ensure your clauses are enforceable and, on the other side of the coin, when you shouldn’t sign
There’s a commonsense element to the non-compete clause. A business owner asks new employees to leave behind customer lists, intellectual property, proprietary information, etc., should they ever depart the company. It’s called covering your assets.
But there’s a downside. Done improperly, such an agreement may be a lawsuit waiting to happen. The number of judicial non-compete decisions published annually has tripled in the last 20 years, according to Steven W. Fogg, an attorney with Corr Cronin Michelson Baumgardner & Preece in Seattle.
To sort out the rules of the road, we talked with Beth Milito, senior executive council with the NFIB Legal Center.
Why does a small business need a non-compete clause?
"It’s important to protect proprietary, confidential information. This may even just amount to customer lists. By signing such an agreement, an employee may agree to not work for a direct competitor for a specific period of time, in a specified geographic area. It can also specify that the employee will not disclose certain information to a future employer, especially the customer list. That is the biggie that I hear about from NFIB members. Intellectual property also can be important for a small business, depending on the industry."
Are such agreements enforceable?
"Courts are going to look at what is reasonable. One year is typically seen as reasonable, two years, maybe. Three years: Probably not. And it varies a lot from state to state. It is subjective, but it is a very fact-specific inquiry. In the example of a salon and its customer lists, there might be a geographic limitation of one mile. In a rural area, that might be fine, but in a city like Washington, D.C., the courts will strike that down because one mile is just unreasonable. It depends on the facts."
What’s not OK?
"It is not OK to say that you will never work as a hairdresser ever again in this town. Courts do not like something that prohibits someone from having gainful employment. That’s a public-policy thing. We want people to be able to be employed. That’s part of the reason that in California non-competes are illegal. They cannot be enforced, because we do not want to prohibit employment."
When should a business owner present the agreement?
"I get calls from members who want to have an employee sign this when they give notice. That is not going to float. So you have to do it when the person is first hired. You can make it a condition of employment, although in some states you must provide separate consideration, for example, a signing bonus. Basically, if the employee is giving up something, you need to give something in return, besides just a job."
How can a business owner enforce an agreement?
"There is a psychological component: Reminding them when they give notice that they have signed this agreement, because they may have forgotten about it, depending on how long they have worked for you. If you do in fact have a conflict down the road, you start with a letter from your attorney. Don’t download a form from [legal website] Nolo.com, or if you do, have an attorney review it. A letter may be enough to call them off. Should you go to court? You have to ask yourself: How much is this going to cost your business? Is the juice worth the squeeze? You will need to get counsel involved, and attorneys do cost money."
...And if I win?
"There is the potential for damages. That will depend in part on what was specified in the agreement. The court will try to limit the scope of the award, but it may be possible to recover lost revenue and potentially your attorney’s fees."
If I have signed an agreement and now am leaving, do I have flexibility in what I do next?
"You could just take a gamble, figure this thing is not enforceable, that this agreement does not pass the 'reasonable' test. So there is low risk and high reward: The agreement isn't enforceable and you already have a new job. Alternately, you should have your attorney look at it or even have you new employer’s counsel look at it and possibly work something out with the former employer. That comes up most often in high tech, where there is a lot of recruiting and hiring among competitors. They anticipate that there will be a non-compete issue and they typically ask about this up front when they interview individuals."