Noncompete Agreements: How Solid Is Yours?

There are many misconceptions and assumptions regarding the use and effectiveness of non-compete agreements. This is not surprising considering that judicial enforcement of these agreements is very fact-intensive and situation-specific. There are no bright-line rules to help business owners determine whether a non-compete agreement will be enforceable. Therefore, although it can be challenging to craft one that will provide maximum protection without being vulnerable to a challenge in court, there are other options available.

Common Pitfalls with Noncompete Agreements

1. Failing to identify what is being protected. One consequence that business owners face is that they fail to put much, if any, time or effort into evaluating what legitimate business interest they are explicitly trying to protect when asking their employees to sign a non-compete agreement. These agreements are often implemented because it seems like a good business practice from a human resources perspective. However, a deeper dive into the desired protections of these agreements is critical to ensure their effectiveness and enforceability.

2. Using a non-compete agreement when non-solicitation is desired. Similarly, employers may assume they need to use a non-compete agreement, when actually, they need a non-solicitation agreement (restricting someone from taking customers, employees, etc.). Or a confidentiality agreement (restricting someone from using trade secrets or other information). Business owners should know that just because a non-compete agreement may have fit the company's needs and business activities two or three years ago, this does not mean that such an agreement is still a good fit for the business today.

Issues to Consider when Requiring Employees or Contractors to Sign a Noncompete Agreement.

If you want to add another layer of protection to your business by implementing a non-compete agreement, there are a few questions you should ask as you get started:

1. Is the obligation to sign the non-compete coupled with valid consideration?

2. Could the employee or contractor make a valid claim that you negotiated the non-compete in bad faith?

3. Does your company have a legitimate business interest that the non-compete attempts to protect?

4. Is the duration and geographic limitation of the non-compete reasonable to protect the company's legitimate business interests?

5. Could the terms or conditions of the non-compete be viewed as being against public policy?

Options Available to Enforce a Noncompete Agreement

Enforceability of a non-compete can vary from state to state. This can be particularly problematic for larger companies with employees or contractors throughout the country. However, Idaho law, which generally invalidates non-compete agreements, recognizes the need to protect a company's trade secrets and other confidential information. Typical enforcement options include a lawsuit for damages and injunctive relief from the court to immediately stop severe damages from violation of the non-compete agreement (often referred to as a temporary restraining order).

Nonlegal Issues to Consider

In determining whether non-compete agreements will be in the company's best interests, business owners should consider how a non-compete agreement may affect employee morale or loyalty, both as a result of the required execution of the agreement and the enforcement of the agreement. Suing an employee who has quit or been fired might send the wrong message to current employees, even if the lawsuit is pursued for valid reasons.

Contact Our Office

To ensure that you (1) use the correct document for your business protection needs, and (2) navigate the applicable law in your local jurisdiction— Armis Law, PLLC will help you draft a noncompetition, non-solicitation, or confidentiality agreement that will be upheld by a court and protect the legitimate business interests that you have worked hard to build.