Does My Company Need A Non-Compete?
Non-compete agreements, although controversial, are definitely not a thing of the past. As a business owner, you need to protect yourself, your business, and your trade secrets in case of a potentially disloyal employee, and a well-drafted non-compete agreement can be a valuable tool to provide this protection.
What Is a Non-Compete Agreement?
A non-compete agreement prevents an employee from participating in activities that compete with those of the employer. Usually, a non-compete agreement restricts an employee’s activity after the employment is terminated. Employers who compel non-compete agreements on their employees are often attempting to prevent that employee from using information or special training gained through that employment to help a competing business. Employers want to protect their “secrets” and prevent ex-employees from using that privileged information for their own gain.
When a non-compete agreement is violated, the employer may be awarded damages for lost or expected profits. An employer can also receive compensation for attorney’s fees and incidental damages based on the terms of the non-compete agreement. In some instances, the employer might be awarded an injunction, forcing the employee to stop competing under the terms of the agreement.
Who Needs a Non-Compete Agreement?
Not every business needs its employees to sign non-compete agreements, and not every employee needs to sign a non-compete agreement. Non-competes are very useful to businesses that have trade secrets or confidential information. However, a business’s use of non-compete agreements should be limited to those employees with actual knowledge of the secret or confidential information.
If your bakery has a secret recipe for making the best red velvet cake in all of Middle Tennessee, this might be valuable information you would like to keep confidential. If your cake recipe gets out and other bakeries start using that recipe, you might lose hundreds of potential customers who might have purchased that red velvet cake from you but can now purchase the same cake at a bakery significantly closer to their home.
Your bakery would benefit from having employees with access to the red velvet cake recipe sign a non-compete agreement upon employment. Such a non-compete would provide your bakery with a legal remedy in case an employee or ex-employee shared your valuable red velvet cake recipe.
When Is a Non-Compete Agreement Upheld?
While many courts disfavor non-compete agreements—believing that they restrict free trade—a tightly-drafted agreement strictly following state policy and court guidelines can greatly increase the protection of a business’s trade secrets and confidential information.
Courts use a form of balancing test when deciding whether or not to uphold a non-compete agreement. Some of the major factors weighing in are 1) whether the employer has something worth protecting, 2) whether competition from an employee or ex-employee would truly harm the employer’s business, and 3) whether the non-compete agreement was too restrictive on the employee.
An employer’s non-compete agreement should not be overbroad or overly disadvantage the employee but should instead protect the employer’s interest without placing excessive economic hardship on the employee. There should also be sufficient consideration between the parties. This means that each party to the agreement—the employer and the employee—should receive a benefit by signing the agreement. The employer benefits because it has a remedy if the employee exposes its business secrets, and the employee benefits from a continuation of employment.
Two other factors to consider when drafting a non-compete agreement are 1) that a non-compete agreement should not restrict an employee’s activities for longer than is necessary to protect the employer’s interests, and 2) that the non-compete agreement cannot restrict the employee from competing everywhere, but only in a geographic sphere large enough to protect the interests of the employer.
Non-compete agreements are effective when they are drafted correctly and can provide protection to employers with confidential information, especially when employees have access to that information.
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