When is a non-compete enforceable?
Restrictive covenants protect businesses from employees stealing institutional knowledge, but these agreements aren’t easy. Common restrictions include nondisclosure (don’t tell others my stuff) or NDAs, and noncompetition (don’t steal my stuff). Without them, your former employee may take your clients or open a competing business next door after she quits. Restrictions are judge by the activities prohibited, geographic scope and time limits.
States like California and Louisiana only enforce non-competition agreements in limited situations. Others, like Virginia, strongly disfavor them, and lean toward non-enforcement. Still others, like Ohio, may modify an overly-broad provision and enforce the revised clause. In drafting these agreements businesses must clarify what they do, what information the employee could access, where clients are, and the client life cycle.
Noncompetition restrictions must “fit” your business. A high-end boutique can’t prevent it former employee from working in the entire fashion industry, only in a competing boutique or similar position. Time limits related to your client acquisition and performance period are more likely to be enforceable than arbitrary year limits. Similarly, if your clients come from a 10-mile radius, a state-wide restriction is likely unenforceable. Also, your COO and receptionist shouldn’t have the same restrictions as they have different access to information and clients. Agreements that only prevent providing competitive services to your customers (or hiring employees) are more enforceable as restricted activities and geographic scope are limited to a finite list.
Finally, NDAs rarely have to meet the more stringent noncompetition tests. “Confidential information” should be carefully defined to cover the sensitive information the employee could access. Also, confidential information can go “stale” so an agreement protecting this information forever risks non-enforcement. Determine how often your company’s information is refreshed, and tie any time limitations to this business reality. When used appropriately restrictive covenants keep your institutional knowledge with your business.
Restrictive covenants are tricky to get right and it’s important to consult with an attorney to determine if you need one and how to improve the odds that a court will enforce them. If you need advice related to non-competition agreements, employee management or would like assistance with any other business matter, please contact Nancy at Land, Carroll and Blair, PC, in Alexandria and Fairfax, VA at:
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