Protect Intangibles with Noncompete
and Nonsolicitation Agreements

03/07/07

In June 2004, a 24-year-old software engineer at America Online was accused of stealing 92 million e-mail addresses belonging to 30 million AOL customers. He allegedly sold the list to Internet spammers, violating the trust of his employer and its customers.

Although the AOL incident is remarkable, departing employees present an equally thorny issue when they have the potential to take customer lists, trade secrets, marketing plans, other intellectual property or even other employees to the competition. Though they are not foolproof, you may be able to protect yourself through noncompete and nonsolicitation agreements.

Noncompete agreements

Anytime an employee can disadvantage you in the marketplace by working for a competitor, you should consider having a noncompete agreement. A reasonable noncompete agreement is designed to prohibit departing employees from taking special knowledge, customer contacts or skills to a competing business and giving it an unfair advantage. The more sensitive your company is to competition, the more important noncompete agreements may be.

Difficult to enforce

There is no federal law governing noncompete agreements, and there is a huge difference among states on how they are enforced. Half of all noncompete agreements may be unenforceable. Courts may protect the employer if the agreement is “reasonable” and only for the length of time it takes to create an even playing field. Courts don’t look favorably on noncompetes that unfairly limit a former employee’s right to earn a living.

Here are some tips you may want to consider for drafting a valid noncompete agreement:

The document must be reasonable in its geographic scope. The agreement can’t cover too wide a geographic area.

The noncompete must have a reasonable time duration. It can’t last too long.

Don’t prohibit the employee from engaging in many types of businesses.

Don’t use generic, boilerplate language. Try to customize the agreement for each situation.

Relate any restrictions to what you seek to protect.

In some states, you must give something in exchange for signing a noncompete, such as compensation when hiring.

You need a good business reason to require such a document. Be specific when defining what you want to protect.

The noncompete should be limited to key employees or those in a position to harm your business through competitive activity. Don’t overreach by requiring every employee to sign one.

Check your state’s law on noncompete agreements. Some states limit the time and scope of permissible restrictions. California prohibits noncompete agreements altogether.

Nonsolicitation agreements

Less restrictive than noncompetes, nonsolicitation agreements require your employees not to solicit your clients or customers, in their own behalf or for a competitor, once they leave your company. Nonsolicitation agreements may also require your employees not to solicit other employees when they leave, thus preventing a raid on your staff. Once again, “reasonableness” standards apply. You must have a valid business reason for placing a nonsolicitation restraint on an employee. Consider the following business reasons:

Protecting a valuable customer list you’ve spent years amassing.

Protecting trade secrets and other confidential information.

Protecting your business from the mass departure of valuable employees with specialized skills, knowledge and access to trade secrets.

Noncompete and nonsolicitation agreements may be appropriate tools in protecting your business in a highly competitive environment. To become even more effective, make it common knowledge in your industry that you enforce such agreements.

Asset Protection System
Includes:

Employee Confidentiality Agreements

Employee Work Product Agreements

Nonsolicitation Agreements

Return of Company Property Certificates