Academic journal article Defense Counsel Journal

Using Noncompete Agreements to Protect Legitimate Business Interests; Carefully Drafted Agreements Will Prevent Former Employees from Using and Disclosing Proprietary and Confidential Information

Academic journal article Defense Counsel Journal

Using Noncompete Agreements to Protect Legitimate Business Interests; Carefully Drafted Agreements Will Prevent Former Employees from Using and Disclosing Proprietary and Confidential Information

Article excerpt

THE definition of "trade secrets" is broad, and both statutory and common law protect them from misappropriation. While this may appear to be sufficient protection, all organizations and companies have confidential and proprietary information that inevitably will fall outside any definition. Customer and client relationships, for example, generally do not qualify as trade secrets. In today's business environment, all information that provides a competitive advantage, which includes not only trade secrets but also much of other confidential information, has become increasingly important.

For these reasons, companies often use noncompete agreements, which also are referred to as restrictive covenants, to protect their non-trade secret confidential and proprietary information and their customer relationships. Noncompete agreements generally prohibit employees from competing against the company, from soliciting the company's customers, and from disclosing any of the company's confidential information--be it a trade secret of something else--both during and after the term of employment.

ENFORCING NONCOMPETE AGREEMENTS

Most jurisdictions, with California being a notable exception, recognize and enforce noncompete agreements. Florida, for example, has enacted a comprehensive statute to regulate both noncompete and nonsolicitation agreements under the title "Valid Restrictions of Trade and Commerce Law". (1) Cases involving noncompete agreements are extremely fact-specific, involving an analysis of the agreement's terms and a weighing of the company's interests, the employee's interest, and the public's interest. Often, authority can be found within a jurisdiction for enforcing or rejecting the same noncompete agreement.

A. Rule of Reasonableness

Courts will and do enforce noncompete agreements that are reasonable. To be found "reasonable" a noncompete agreement must meet four tests.

* It must protect a company's legitimate business interest. If there is no such interest, there is nothing for the noncompete agreement to protect. The Florida statute, for example, requires the court to "construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established."

* Its scope must be no greater than what is required to protect that legitimate business interest. For example, the agreement must have reasonable temporal and geographic restrictions.

* It must not impose an undue hardship on the employee. Under the Florida statute, however, courts are expressly prohibited from considering "any individualized economic or other hardship that might by caused to the person against whom enforcement is sought."

* It must not be injurious to the public. (2)

B. Consideration

As when they consider any other contract, courts look to see whether the employee received consideration for signing the noncompete agreement. The amount or value of the consideration may not be a critical factor because, as the Ohio Supreme Court stated, "It is axiomatic that courts, as a general rule, will not inquire into the adequacy of consideration once consideration is said to exist." (3)

Few questions are raised about consideration when the noncompete agreement is signed at the inception of employment. The job offer itself often constitutes adequate consideration.

After employment begins, an employer can provide consideration for the signing of a noncompete agreement by a current employee in several of ways. Generally, a promotion, raise or bonus, will provide adequate consideration to support a noncompete agreement. Giving an employee who was previously an at-will employee a written contract that permits termination only for cause in return for signing a noncompete agreement also constitutes adequate consideration. (4)

How about a promise of continued employment? Some jurisdictions do not view that as adequate consideration to support a noncompete agreement signed after the employee commences employment. …

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