How to Draft a Non-Compete Agreement That's Actually Enforceable
Though it may mean a few frantic days and maybe more than one sleepless night, most entrepreneurs can manage the loss of a key employee relatively well. However, the thought of your key employee going to work for a competitor and calling on her old contacts to divert business away from your company may have you seeing red.
Fortunately, most business owners are savvy enough to have their employees sign non-compete and confidentiality agreements. Unfortunately these agreements are sometimes unenforceable.
Are your non-compete and confidentiality agreements sufficient to withstand court scrutiny? If you are unsure, it’s time to take a close look at them. The tips we offer here will help you avoid obvious pitfalls, but to be certain that your agreements will hold up in court, you should confer with your attorney.
Make your restrictions reasonable.
Your business is your baby. It may be tempting to be heavy-handed in your non-compete provisions, but it’s important to be reasonable. Excessive restrictions in your non-compete make it more likely that a judge will not enforce it. For example, attempting to bind someone for more than one or two years after he leaves the company may not be enforceable. You may reasonably demand a longer duration for higher level employees, like CEOs, where three to five years is not unheard of, depending upon the facts and the jurisdiction. And when you seek to restrict the distance in which a former employee can conduct business, it should not be any larger than the area in which you ordinarily conduct business. Therefore, a regional business can’t extend a non-compete to the entire country.
While a court may modify an unreasonable term or terms of a non-compete agreement, it can also invalidate an entire agreement if it finds credible evidence that the employer deliberately included overly broad language that renders an agreement unreasonable and oppressive.
Related: How Can I Get Out of a Non-Compete?
Use industry, business and employee-specific parameters.
To enforce a non-compete, you must show the existence of special facts over and above ordinary competition, so the agreement should be specific to your business, industry and employee.
You cannot simply restrain ordinary competition. A former employee may provide ordinary competition by simply being intelligent, personable and hard-working in his new job. Special facts give him an unfair advantage in competing with you.
These special facts include:
- You provided specialized training to the employee, If you imparted to your employee a unique knowledge or skill through specialized training, then you have a good chance of enforcing a non-compete that prevents that employee from leveraging this training against you in a new job. Keep in mind that this specialized training may not be an actual training course. It could be obtained on-the-job.
- The employee was given access to trade or business secrets or other confidential information. You have a legitimate business interest in keeping your former employees from using your trade or business secrets or other confidential information in competition against you -- and this is why your employees should sign a confidentiality agreement, as well as a non-compete.
- The employee has become the face of your company to customers. Very often, key employees think your customers are actually their customers because they are the customers’ main contact. However, they are customers only because your company offers a service or product the customers are buying.
Include a choice of law provision.
Your non-compete and confidentiality agreements should explicitly state the law under which any breach of those agreements will be adjudicated, and the venue in which all legal action arising from the agreement will be heard.
This may seem like a minor point – until you find yourself in a New Orleans courtroom attempting to enforce your non-compete agreement under the Louisiana code of law.
It’s often the details, like neglecting to narrow the agreement to your circumstances or failing to specify law and venue provisions, that can cause the most pain -- all the more reason to carefully draft and scrutinize your non-compete and confidentiality agreements, and have your attorney look over carefully.
You’ve worked too hard creating your company to see it damaged, or even destroyed, with a weak non-compete. A strong, carefully tailored agreement can give you confidence to safeguard your protectable business interests.
Autumn Gentry is a member attorney with the Nashville office of Dickinson Wright, PLLC. She focuses her practice in corporate and business law and litigation. She can be reached at AGentry@DickinsonWright.com.