Drafting An Enforceable Non-Compete Agreement: 6 Considerations

A non-compete agreement (NCA) is an invaluable tool that protects a business owner from unfair competition by former employees. These agreements are also useful when working with investors, manufacturers, and developers. Typically, entrepreneurs are savvy enough to provide at least a non-compete clause in their employment contracts. However, these clauses are regularly found unenforceable. The following steps illustrate how to draft a non-compete agreement in such a way that it is more likely to be enforced should an employee stray to a similar profession or trade in competition with the business owner.

1.      Reasonableness is key

The restrictions set forth in an NCA cannot be against the public interest and therefore must be narrowly drafted. Geography, time, and remedies are typical considerations for reasonableness. The NCA should apply geographically to the area that the company regularly conducts business and no more. The timeframe of the covenant should be no more than two years because courts have regularly found that anything in excess of that is likely invalid. Consider then the remedies you want to seek in the event of a breach – some jurisdictions allow the recovery of attorney’s fees while some do not.

The practice point here is that the restrictions must be the minimum necessary to protect the company. If found to be excessive, the NCA will be found unreasonable and therefore unenforceable. Research and learn the business’s jurisdiction law and opinions regarding NCA enforceability.

2.      Use industry, company, and employee-specific standards as your guide

Simply restraining ordinary competition is not allowed. To support reasonableness of the restrictions, tailor the NCA to the applicable employees and their particular circumstances. Enforceability of the agreement rests on special facts beyond ordinary competition. These facts include:

·      Employee’s role in the company

The employee may be essential and the face of the company or they may be more administrative and have less interaction with the company’s clients. Consider the employee’s specific duties and position within the business when drafting the NCA.

·      Nature of the company’s business

Consider what are the standards that the company applies in the daily routine. There may be a flow of confidential information that needs a confidentiality clause within the NCA. If so, then a non-disclosure agreement or confidentiality agreement may be coupled with the agreement. Notably, the confidentiality agreement should be intellectual property specific and the restrictions should include both confidential and proprietary information.

·      Industry the company competes in

Identify the business’s key competitors. Think about the nature of the industry as a whole in order to determine how your restrictions will effectively stop an employee from competing against the business.

·      Specialized training offered to the employee

If the company imparted specialized training, unique knowledge, or skill, then there is a good chance of enforcing the agreement. Specify in the NCA that the employee is barred from leveraging this training against the business in a new job. Note, the specialized training need not be a formal course, it can be obtained on the job.

·      Employee’s access and relationship with customers

The employee’s interaction with customers is an essential consideration for an NCA. Does the company also need a non-solicitation agreement to accompany a non-compete? Be sure to include a bar on employees soliciting customers and also other employees to join them.

·      Employee’s access to confidential or proprietary information

Similar to the employee’s access to customers, the employee’s exposure to confidential or proprietary information can change the way the NCA is drafted or whether it is coupled by other contracts such as a non-disclosure agreement.

While person-to-person customization of the agreement is advisable, if a template must be used, prepare multiple versions as necessary and customize the agreement template to accommodate the laws of each jurisdiction where employees work. Avoid using only one template – If one is found unenforceable against one employee, it is unenforceable against all those employees with the same templated agreement.

3.      Include a Choice of Law & Venue provision

Know the jurisdiction. Picking the right state can heavily influence enforceability because each state has different case law and standards regarding non-compete reasonableness. For example, some states award attorney’s fees where others do not. Non-compete and confidentiality agreements should explicitly state the law under which any breach of those agreements will be adjudicated, and the venue in which all legal action arising from the agreement will be heard. It is in favor of enforceability to simply concede the choice of law at the convenience of the employee.

4.      Provide consideration for the agreement

In order to be valid, a contract must include consideration. Typically, the initial job offer in return for an employee’s signature on the NCA is sufficient. For current employees, however, the business cannot force them to sign the agreement without additional consideration such as a promotion, bonus, stock option, or similar offering.

5.      Identify business interests that should be protected

Does the business need a non-compete, a non-solicitation of customers, a non-solicitation of employees, or a non-disclosure agreement? Or does the business need all four? Consider and identify who the stakeholders are and who has access to information that you want to restrict. For example, inventors should use their agreements when working with manufacturers, investors, and developers as well as employees.

Choose restriction suited to protect each interest and be prepared to enforce it. If employee A leaves and competes but the business does not enforce the NCA, and then employee B leaves thereafter and competes but the business does sue employee B, it is unlikely that a court will find that legitimate business interests are being harmed by the employees’ activities.

Injunctive relief, for example, is a common provision of an NCA that states if there is a breach, injunctive relief is a reasonable remedy to cure that breach. Also state that where there is a breach, there is a presumption of irreparable harm to the business and the employee consents to injunctive relief as a remedy. Other similar provisions to include are requests for attorney’s fees, a return of confidential information, and a savings clause that notes that where one provision of the NCA is found invalid, the remaining provisions remain enforceable.

6.      Include an assignability provision

Most jurisdictions will not enforce a non-compete if the ownership of the business changes. If the jurisdiction does allow assignability, make it clear that the company may assign the agreement to any affiliated company or successor in interest without notifying the employee. Define the term “company” to include company, successors, and assigns.

La'Cee Conley is an experienced international intellectual property attorney and owner of Conley Consulting & Portfolio Advisors. After earning Bachelor degrees in physical chemistry and in neuroscience, she earned her Juris Doctor and Master of Law at Drake University, specializing in international intellectual property and international law. She completed her Master of Business Administration at Iowa State University. She currently specializes in patents, trademarks, and copyrights around the world relating to chemical, nanochemical, small molecule, biological, neurological, pharmaceutical, oil & gas, and general mechanical applications.