Drafting and Litigating Non-Compete Agreements

Date: Jan 25, 2002

Most companies are in business to make money. There is no faster way to lose money -- lots of money -- than to allow your confidential business information and customer lists to fall into the hands of your competitors. Companies generally do a better job of protecting their tangible property than their intangible property. Whether it is a secret formula, manufacturing technology, marketing information, customer list or other proprietary information, a company should do everything it can reasonably do to ensure that its most valuable resource -- information -- does not inadvertently fall into the hands of a competitor.

The most common way a competitor obtains your information is by hiring away a high-level employee with access to confidential information. To prevent such former employees from injuring your business, you should consider requiring them to sign a non-compete covenant or agreement. The non-compete agreement is a restriction on what an employee may and may not do when that employee leaves your employ. It is essentially a written contract between the employee and the employer. The law governing covenants varies state-to-state but, generally, the employer's offer of employment, and sometimes even continued employment, is sufficient consideration to render the agreement valid. Employers can make such an agreement a condition of employment.

The technology boom in the last several years has made non-compete agreements one of the most contentious and dynamic areas of employment law and litigation. Because of the wide variances in state law and court enforcement of non-compete agreements, legal counsel is absolutely essential before drafting any such agreement. The more the non-compete agreement is tailored to fit the individual employee and the employer’s specific concerns and circumstances, the more likely it will be enforced by the courts.

Non-compete agreements must be reasonable in terms of the type and scope of information being protected. There are two types of information that may be restricted. The first is trade secrets, which are non-public information that the business takes "reasonable measures" to protect and are sufficiently valuable to be of economic significance to you and competitors. The second type is general information about the company and the industry that the employee has gathered over the course of employment. The first type, trade secrets, should never be disclosed to a competitor or outsider, and internal access to trade secret information should be closely controlled. In this regard, the non-compete agreement should clearly define the type of confidential information, including trade secrets, that the employee may not, under any circumstances, disclose to his new employer or use in the course of his work with his new employer. Aside from just obtaining agreements from employees not to disclose trade secrets, companies can do much more to their protect trade secrets. For more information click here for our article on "Protecting Trade Secrets".

Unlike a company's trade secrets or other confidential business information, general information about the company and the industry, and the skills and expertise of the employee, may not be suppressed indefinitely. However, the use of such information by your competition may be restricted at least temporarily through a well-drafted non-compete agreement with key employees. The two traditional standards courts have used to evaluate non-compete agreements are the reasonableness of the agreement’s time restrictions and geographical restrictions. Non-compete agreements usually specify a time period during which the employee may not compete with his or her former company by working with any competitor in a specific geographical radius (or companies described or listed in the non-compete agreement). Generally, the non-compete agreement will be deemed valid if it is reasonable in terms of its scope and duration. Once the duration of the covenant has expired, the former employee may begin to compete.

This legal standard is evolving, however, to reflect the economic and technological realities of the new Internet economy. Employers that deal with cutting-edge technologies develop new advances on a monthly, weekly, or even daily basis. Thus, while non-compete restrictions for traditional industries have been enforced for two or three year periods, courts have recognized that durations of such agreements for employees in the technology industry must be much shorter. The Second Circuit recently affirmed a lower court that held, “[w]hen measured against the …Internet environment, a one year hiatus from the work force is several generations, if not an eternity.”EarthWeb, Inc. v. Schlack, 71 F.Supp.2d 299, 316 (S.D.N.Y. 1999), aff’d 205 F.3d 1322 (2d. Cir. 2000).Conversely, geographic scope restrictions have been rendered a nullity by former employees’ abilities to transfer information instantly from virtually any location on the planet. Intelus Corp. v. Barton, 7 F.Supp.2d 635, 641 (D. Md. 1998) (The court found that no geographic restriction was reasonable because of the global and specific nature of the market in question.); See also Padco Advisors, Inc. v. Omdahl, 2002 WL 57242 (D. Md. January 11, 2002).

The unparalleled mobility of employees in the technology sector is putting dual pressures on the courts when interpreting and enforcing non-compete agreements. On one hand, employers argue that there is almost inevitable disclosure of protected information. On the other, employees argue that the stifling effect of these agreements could affect the ability of workers to move freely from job to job and could exacerbate the already tight labor market. Litigating non-compete issues calls for swift, decisive action. Most of these cases are decided at the preliminary injunction phase, before the issues can be fully litigated.Successful non-compete agreements depend on careful draftsmanship at the front end, with clearly defined goals and restrictions that a court can readily grasp. If litigation is necessary, however, employers need experienced employment litigation counsel to navigate this potentially tricky area of the law.

For more information on how Keller and Heckman can assist your company in drafting its non-compete agreements, evaluating existing agreements, protecting trade secrets or litigating once an employee has breached a covenant, please contact Art Garrett , a partner with the firm's litigation department at (202) 434-4248 or garrett@khlaw.com; Matt Wright , a litigation associate at (202) 434-4133 or wright@khlaw.com; or Manesh K. Rath , an employment law attorney, at (202) 434-4182 or rath@khlaw.com.