NFIB

Will a Non-Compete Protect Your Small Business?
06/ 03/ 2003

by Robert M. Linn and Alyze L. Pierce

One of the biggest problems for entrepreneurs in every industry is employees who leave and establish competing businesses nearby.

When it happens, your challenge is not to prevent the employee from leaving, but to protect your business from losing competitive, sensitive business information and clients. Non-compete agreements may help your small business safeguard confidential information and trade secrets, and prevent disruptions in customer relations -- but only if they can pass muster in the courtroom.

Here are a few things to consider in a non-compete agreement:

Length and scope

Employers must demonstrate that employees had access to confidential information that would be damaging if communicated to a competitor. If so, the agreement generally will be considered enforceable only if it's reasonable in duration and geographic scope.

What's "reasonable?" Agreements that restrict former employees from working for a competitor for up to one year are usually considered reasonable. If you prohibit former employees from working in certain territories, they must conform with the area in which you operate. Courts won't agree with geographic prohibition if it's broader than necessary.

Fairness

To maximize the likelihood a court will enforce a non-compete agreement, employers should also make sure the circumstances are fair. Provide employees with a copy of the agreement to review before they start to work, and give them a chance to consult legal counsel and ask you questions about it. Although not a legal prerequisite for enforcement, these steps make an employer seem more sympathetic, fair and reasonable, increasing your probability of success in litigation.

Timing

Non-compete agreements should be executed before an employee begins working for your business. In some states, waiting just a few weeks could hinder the enforceability of the agreement. For a non-compete agreement to be executed after an employee starts working, the employer must offer the employee additional consideration for the restrictions, such as a raise or benefits increase.

For more on legal issues similar to this one, visit the "Legal" section of http://www.NFIB.com/ToolsAndTips.

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This article originally appeared in the June/July 2003 issue of MyBusiness magazine.

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