Perhaps you consider your non-compete agreement just one form in a stack of many? When it is time to use it there is not much to the process: you retrieve it from the HR office, briefly discuss it with the employee, and he willingly signs it. But such a practice is a perilous one because non-compete agreements are not meant to be “one-size-fits-all.” Rather, they should be thoughtfully tweaked to each specific employee and situation. By relying on boilerplate language and fill-in-the-blank forms, you are risking the chance that a court will find your agreement unenforceable.
Unfortunately, there are no bright-line rules that employers can abide by to ensure the legality of agreements, but there are some factors that you should consider when drafting these agreements that should assist employers in enforcing their agreements when the time comes to do so, including:
1) The nature of the industry
The higher the competition in the industry, the more likely a non-compete will be upheld. If the industry is such where an individual may gain sensitive or secretive data, strategies, or business models, then a strict non-compete makes much more sense. On the other hand, if succeeding in the industry primarily results from people relying on their own strengths (good service, knowledge, etc.), then there is less of a reason to restrict them from competing against their former employer because they will not be relying on what was gained at their previous employment. Compare the industry of a Silicon Valley technology start-up versus that of a general family physician; a non-compete agreement makes much more sense in the former rather than the latter. Lesson – explain clearly the reason why the agreement is necessary.
2) The relevant characteristics of the employer
Is the business local or global? Are there a handful of employees or thousands? Does the employer dominate the industry or is competition fierce? As a general rule, the larger the employer’s geographical reach, the larger the geographical restriction can be. Yet, the geographic reach of the employer is just one of many considerations and must be viewed in light of the entire non-compete. For example, a court may uphold a one-year restriction of competing nationally, if the business is global. On the other hand, if the business is unique to one state (say, breeding racing thoroughbreds) then a five-year, state-wide restriction could be held unenforceable. Take time to understand your business and catalogue its characteristics. Lesson –limit the geographic and durational scope of the restriction as much as is reasonable – and explain the reasons for each.
There are some additional tips worth sharing; check back on Wednesday and I’ll discuss what else you can do to improve your non-compete agreements.
