Published December 2007

The Fox Works in the Henhouse

By Fred S. Steingold (page 74)

A variety of legal agreements signed by top employees can protect your business from competition spawning within the ranks.

Here’s a nightmare that can ruin your sleep.

You hire a bright young man to help manage your business. You spend hundreds of hours training him — and thousands of dollars sending him to management seminars. He learns all aspects of your business.

Then, two years later, he quits and opens his own, similar business a mile from yours. You discover he’s taken your customer list and other trade secrets, and lured away three good employees.

Fortunately, this doesn’t happen often — but it does happen. If your business might be vulnerable, there are steps you can take to bolster your legal position. Basically, these steps involve having key employees sign one or more agreements making clear the legal consequences of being disloyal.

You can do this with a new employee, or one who’s been on your payroll for a while. But in the case of an existing employee, be sure you offer something of value in exchange for his or her signature. This can be, for example, a bonus or a raise. (In legal jargon, this is called “consideration.”)

None of the agreements suggested here guarantee your business won’t be damaged by a wayward employee. But the agreements give you powerful weapons to limit the damage.

You can have separate agreements, or one big agreement that covers all the subjects described here.

Non-Compete Agreement

Sometimes this is called a covenant not to compete. If carefully worded, judges in most states will enforce it. A few states (such as California) don’t enforce these agreements.

In a non-compete agreement, the employee agrees not to open a business similar to yours, or work for or own an interest in a competing business. If you go to court to enforce a non-compete agreement, the judge will scrutinize it to make sure it’s reasonable. You may be out of luck if the agreement unreasonably limits the employee’s ability to earn a living. To improve the odds that a non-compete agreement will be enforced, consider these suggestions:

• Refer to a specific geographic territory. For example, the employee might agree not to compete with your business in your city or county. This suggestion won’t make sense, however, if you have a national business, or one that operates primarily over the Internet.

• Limit the duration. Perhaps have the employee not compete with your business for two years after leaving your company.

• Be reasonable in how you define what constitutes competition. If you own a restaurant, for example, you might not want your chef to open his or her own restaurant, but working as a chef for someone else may not be a problem.

• Make sure you have a legitimate business reason for the non-compete agreement. Not all employees are true competitive threats — only those with more responsibilities and access to inside information.

Let’s say an employee signs a well-crafted non-compete agreement, and then violates its terms. What can you do about it? You can go to court and ask for an injunction. If you’re successful, the judge will order the employee — or ex-employee — to stop competing. If the person continues to compete, he or she will be in contempt of court and may be jailed. The judge may also award money damages to your business.

Non-Disclosure Agreement

This is also known as a confidentiality agreement. The employee acknowledges that you’ll be sharing confidential information with him or her. The employee agrees not to use the information for his or her personal benefit, or to reveal it to others without your permission.

These agreements are very common in high-tech business, but they have a place in other businesses as well. A non-disclosure agreement can cover many types of information that give your business a competitive advantage. This includes trade secrets such as unique formulas and processes, or marketing plans, pricing arrangements, and lists of customers and suppliers.

Of course, you can’t protect information that’s generally known in your industry.

You can further protect confidential information by keeping it locked up, and by revealing it to employees only on a need-to-know basis.

As with a non-compete agreement, you can ask for an injunction and money damages if the employee or ex-employee violates the non-disclosure agreement.

Non-Solicitation Agreement

Here, the employee agrees not to hire away any of your other employees. Whether or not your employee is allowed to compete with you after leaving your business, you’d hate to lose other valuable workers.

The employee signing a non-solicitation agreement also agrees that after leaving your business, he or she won’t solicit business from any of your customers or suppliers.

Again, this type of agreement isn’t necessary for lower-echelon employees.