Two of the most valuable assets of your business are the goodwill and the intellectual property that you’ve developed. A noncompete agreement can be instrumental in protecting these aspects of your business from a wide range of problems with departing employees, including the spread of trade secrets and other confidential information to your competitors. Today’s post will discuss the legal requirements you should keep in mind in order for your noncompete to be enforceable, and some of the potential benefits of using a noncompete agreement in your business.
Setting the Stage
At some point during the life of your business, you will likely need to recruit, train, and rely on employees to help grow (or simply maintain) your business. You’ll have to trust your employees since they will likely have access to your business’ confidential information, including its trade secrets and other intellectual property. Further, your employees will likely create long-lasting valuable relationships with your customers. Just think of what’s at stake when the time comes for an employee to move on from your business; your employee may take advantage of your business’ goodwill, customer list, and any confidential product information. Maybe they’ll sell it to the highest bidder. This, of course, is the worst case scenario—something that us lawyers are great at thinking up and discussing—but the bottom line is that this type of thing happens (more often than you would think). And the main reason that this happens is that businesses do not take the appropriate steps to protect the company’s information.
It’s important you take the necessary steps to ensure that your employee doesn’t take your trade secrets and customer relationships they developed while working for your business to a competitor, or perhaps to they’ll go start their own similar business and compete with you. This is why a noncompete agreement can be so important.
To be enforceable, a noncompete agreement must be “reasonable”
In Washington State, noncompete agreements must be “reasonable”—ironically this is the most overused word in the legal industry, and yet, there’s no clear definition. Generally, courts will apply a three part test to determine whether the noncompete is reasonable:
- Whether the restriction on the employee is necessary to protect a legitimate business interest;
- Whether the restriction imposed on the employee is any greater than reasonably necessary to secure that business interest; and
- Whether the degree of injury to the public (losing you as an employee) is great enough to warrant a refusal to enforce the agreement.
In addition, since noncompete agreements are “contracts”, there must be valid consideration for the agreement to be encorceable, i.e. the employee must receive something of “legal value” in exchange for the promise not to compete with your business. Consideration, in these circumstances, is usually satisfied by the promise to employ the individual or, if the individual is already employed, by promotions, raises, or other additional benefits. It’s important to note that a mere promise of continued employment to a current employee is not valid consideration, since the employee isn’t receiving anything that the he or she was already promised.
In determining the reasonableness of the noncompete, courts will look to the scope, territory, and time restraints imposed by the noncompete. An overly broad noncompete agreement (e.g. 10 years and spanning over the western half of the U.S.) will not be enforceable against an employee because it restricts the individual’s ability to make a living. Courts will also look to the skills and knowledge of the former employee to determine whether it was reasonable for the individual to seek work outside the scope of the noncompete. For example, a former employee who has worked as a bio-chemist for 25 years is unlikely to find work outside the bio-medical industry and a noncompete restricting his or her ability to work anywhere within that industry may not be enforceable. Whether the noncompete is overly broad is a fact-specific analysis and determined by the individual circumstances in each case.
How Does a Noncompete Benefit Your Business?
A carefully drafted noncompete agreement that is customized to meet your business’ specific needs can protect you from a loss of business and costly litigation down the road. A noncompete will also signal to your employees that you expect a degree of loyalty in return for their training and employment, which is valuable in building long-lasting professional relationships with your employees.
With a proper noncompete in place and your expectations made clear upfront, your business’ valuable information can be protected and your employees will think twice before they choose to exploit any part of your business for their own, or a competitor’s, benefit.
When drafting your noncompete, you’ll want to take into account the legal requirements listed above to make sure your noncompete agreement is enforeceable. Some of the requirements are not crystal clear and, while this can be a relatively simple agreement, it is useless to you if it turns out to be unenforceable. You should always consult a lawyer when preparing any legal documents related to you and your business.
If you have any questions about noncompete agreements or other ways to protect your company’s assets, please contact us today to schedule your free consultation.