From the December 1998 issue of Startups

Picture this: One day, out of the blue, your key employee, the one you taught, nurtured, championed and confided in, tells you he's leaving to start his own business--a business that will compete directly with yours. Just like that, years of experience walk right out the door, as dozens of important customers follow this pied piper to a new location.

When an energetic, competent, ambitious employee becomes your competitor, it can hurt not only your feelings but your bottom line. While preventive lawyering can't completely eliminate this risk, it can do an awful lot to control it.


Marc Diener is an attorney and author of Deal Power: 6 Foolproof Steps to Making Deals of Any Size (Owl Books/Henry Holt). This article contains general information only. If you are concerned about how these issues might affect you, seek independent counsel.

Street Smarts

Essentially, departing employees may try to take two things with them: relationships and information. If you maintain a primary or overriding connection with customers, departing employees will find it tough to poach. Regardless of whether specific knowledge is legally protectable as a trade secret (more about this later), employees can't steal what they don't know about. As the old Spanish saying goes, "Secrecy is the soul of business."

When a key employee wants to leave, don't react as if an ugly confrontation is inevitable. Consider sweetening his or her deal to keep this valued employee in the fold. In the drama of the moment, it's easy to overlook this option, but it could be your best bet.

Understanding The Covenant

As long as employees are at a job, the law demands they remain loyal to their employers. Thus, departing employees can't solicit the company's customers, talk co-workers into leaving with them, promote their new company or neglect their jobs. But they can prepare for their departure by devising a business plan, forming or buying a company and, in certain cases, telling current customers they're leaving to start a new business.

Noncompete agreements prohibit departing employees from competing in the same business as their ex-employer in a defined geographical area for a specified period of time. A nonsolicitation agreement is a close relative of the noncompete agreement and prohibits employees from soliciting the same type of business from their old company's customers in a defined geographical area for a specified period of time. According to attorney Art Garrett of Keller and Heckman LLP in Washington, DC, "Covenants not to compete are one of the most litigated areas in employment law. They're valid in most states if the restrictions are reasonable in scope and duration."

The key word is "reasonable." Generally, the law allows these clauses if they're narrowly drawn and designed to protect the employer, not just to squelch competition. If challenged, an aggressive company that has imposed an overly broad restriction may have to answer for it in court--and the court may strike the entire agreement, rather than whittle it down to size.

To determine what's reasonable, courts consider whether the restriction causes the employee undue hardship, prevents him or her from using previously acquired skills and experience, or otherwise gives the employer a disproportionate advantage. Whether or not the employee is the sole contact with particular customers is also a factor. Public policy considerations, such as the effect of a particular clause on the availability of certain goods and services (medical services, for example) and on research and development programs may also be relevant. Courts will also examine the specifics of time frames and geographical areas very carefully.

Unfortunately, there are no hard and fast rules for how long you can restrict a former employee from competing with you. It varies from case to case, depending on such factors as how long it would take your company to replace the employee and how often the departing employee was in contact with customers--the less frequent the contact, the longer the restriction.

Finally, like any binding agreement, a noncompete agreement should be a valid written contract signed by the employee. Ideally, it would be part of the original employment agreement signed at the time of hire. Although adding the agreement to an employee handbook couldn't hurt, cautions Garrett, that alone is unlikely to do the trick, and it's best to have the employee sign a separate agreement.

Keeping Secrets

A departing employee may also compromise trade secrets--formulas, patterns, devices or compilations of information used in your business which give you a competitive advantage.

Information as seemingly mundane as a customer list or pricing plan, or as complex as a biological invention or software program, may constitute a trade secret. To determine this, courts consider whether anyone outside your company knows the secret, which people in your company know it, what measures were taken to maintain secrecy, the value of the information, and how easily it could be legally acquired or duplicated.

Although the law requires employees to preserve their employer's trade secrets, a company may have confidential information that doesn't qualify for this protection. Thus, having new employees sign a nondisclosure or confidentiality agreement protecting all sensitive information is a wise precaution. Such an agreement can identify the information to be protected, impress upon the employee the seriousness of the obligation, and provide critical evidence if there's ever a dispute.

Other ways to protect your secrets include document labeling and restricting access to materials. Conducting exit interviews is also a good idea. You can query employees about their plans and remind them of their continuing obligations.

Beefing It Up

Finally, you can put some teeth in your nondisclosure and noncompetition agreements with the following:

  • An ideas-and-inventions clause obligates employees to tell you about any ideas and inventions related to your business that they developed while working for you.
  • A liquidated damages clause establishes the amount of money departing employees must pay you if they take your customers while a noncompete or nonsolicitation restriction is in force. Similarly, you can penalize departing employees by having them forfeit specific postemployment benefits if they breach their nondisclosure or noncompete agreements. Contact your lawyer for more details.

Contact Sources

Keller and Heckman LLP, (202) 434-4248, garrett@khlaw.com