Noncompete Agreements Help Protect Your Business

Small Business Q&A with Tim Knox

Q: One of my former employees has started a competing business
and is calling my clients and trying to steal their business
from me. Do I have any legal recourse against him?
-- Brad J.

A: I hate to break this to you, Brad, but unless this former
employee signed a noncompete agreement while on your payroll,
there is probably very little you can do to stop him from
wooing your customers. You should discuss the situation with
your attorney, but unless this person is also breaking the law
in some other way (using stolen trade secrets, for example)
your attorney will probably concur with me.

Renegade former employees riding the free enterprise wave is
one reason noncompete agreements are gaining in popularity among
employers who hope to use them to help protect their business
from competitive threats launched by former employees. Many
employers are now demanding that key employees sign noncompetes
as a stipulation of employment. While signing noncompetes
usually doesn't sit well with employees who view them as
potential roadblocks to their upwardly mobile career path,
many businesses will not hire a key employee without his or
her signature on the dotted line.

A noncompete agreement is a formal contract between you and
your employees in which they promise not to use information or
contacts pertinent to your business in a competing situation.
In other words, they agree not to take everything they learn
working for you and put it to use for someone else. This could
mean going to work for a competitor or starting a competing
business of their own.
While not popular with employees, noncompete agreements are a
good way for employers to keep key employees on the payroll and
protect the company's proprietary information. That said, do
not go overboard with noncompetes: not every employee should be
required to sign one. If an employee does not have access to
sensitive information, customer or accounting data, or is
integral to the overall success of your business, there is no
need to have them sign a noncompete. The janitor, for example,
poses very little threat to your business if he gets a job
with a competitor. Your sales manager, on the other hand,
can devastate your business by hooking his wagon to a
competing horse.

Which employees should sign noncompete agreements? While the
prerequisites vary from business to business, the following
is a good general list. The term "employees" represents
executive level, management, supervisory, and non-management
personnel relative to that example:

- Employees involved in research or product development.
- Employees involved in the design, fabrication, engineering,
and manufacturing process.
- Employees who service products made and sold by your company.
- Sales and service employees who have regular contact with
customers or sensitive customer information.
- Employees with access to sensitive business information or
trade secrets.
- Most importantly, employees who have sufficient information
about your business that would allow them to start a
competing business.

Most business experts agree that noncompete agreements are
generally a good way to protect your business. The downside
is that noncompete agreements are often difficult to enforce
and in some states, may not be enforceable at all. Many state
courts have ruled that noncompete agreements are too
restrictive on an employee's right to earn a living.

In California, for instance, noncompetes are generally only
enforceable in connection with the sale of a business and not
for employees. In Alabama, noncompetes are generally
enforceable in only two contexts: the sale of a business and
in connection with employment - but even then the enforcement
requires that there be a valid interest worthy of protection.

Some states require that the noncompete be signed at the
beginning of the employment relationship and will only
consider the enforcement of a noncompete signed after the
initial employment date if the signing of the noncompete was
accompanied by a promotion, raise in pay, or other event
that elevated the employee to a more important role within
the company.

To be enforceable, noncompete agreements must be reasonable
on three accounts: Time, geography and scope. Regarding time,
you can't restrict someone from competing with you forever,
so one to three years is the accepted time period for most
noncompetes.

As to geography, you can enforce restriction in the general
area where you conduct business, but you can not enforce the
restriction beyond those boundaries. And for scope, the
agreement can restrict certain actions on the part of the
employee, but can't be so generally restrictive that the
employee won't be able to earn a living working in the same
industry in a noncompetitive position.

One interesting thing to note: noncompete agreements are not
enforceable against certain "professionals," like doctors,
CPAs, and lawyers (who do you think writes all those
noncompetes).

At this point, Brad, the best thing you can do is contact your
attorney to see if you have other grounds for suit, then
contact your customers and let them know what's going on.

Explain the situation regarding the former employee, but do
so calmly and resist the urge to tell them what you really
think of this guy. Showing your anger to the customer is
not going to help you keep their business .

Reaffirm your relationship with the client, tell him how much
you value his business, remind him of your track record and
level of service, then ask one simple question: What can I
do to make sure your business stays with me?

Here's to your success!

Tim Knox
tim@dropshipwholesale.net
For information on starting your own online or eBay business,
visit http://www.dropshipwholesale.net