Non-Compete Agreements: Some Tips to Not Get Embroiled In Future Litigations

Non-compete agreements (NCA) are used by employers to hinder any employee from working with its competitors. One is made to sign such an agreement at the time of joining a firm. These restrictions can even be implemented during enhanced compensation offers like stock options and bonuses.

Most companies require you to sign a non-compete during the time of leaving a firm too. The HR Digest has a list of important points that future joinees and companies hiring should keep in mind while signing or drafting a non-compete agreement.

Drafting

An organization, while drafting a non-compete agreement, should keep in mind its specific business interests and what all needs to be protected under it. Mostly, it is about custom protection. Clients should not be poached, trade secrets an/or confidential secrets should not be shared or revealed. But for these terms to be effective, the restrictions should be “reasonable” under law.

Under these reasonable terms, the company should explicitly explain what all comes under secret and confidential, a geographical and time limit, and the prohibited activity. A time frame of 12 months is considered reasonable for such prohibitions as precedent shows.

The legal aspects should be kept in mind. Laws regarding non-compete differ state by state. Some favor the employee and others give carte blanche to the employers. To avoid any dispute, identify a specific state’s law to govern the interpretation of the agreement.

Further explaining the term “reasonable”— if a company restricts an employee from disclosing any in-house procedure, processes, etc for 5 years, it is considered reasonable. Similarly, if a company operates in a particular geographical location, the agreement can restrict the employee from carrying on any competing business activity in that vicinity. But to restrict him in all the states will not be entertained by any court of law.

An Exit Interview

Conducting an exit interview can serve the purpose of reminding the employee of his/her contractual and legal obligations towards the firm. Also supplying proof of documents of agreement and expected compliance with the obligations, is handy.

It is valuable in gathering information on future employment and if there is any clash of proprietary knowledge. Get an acknowledgment letter of return of all properties belonging to the firm.

Handling of Violation of Non-compete Agreement

Conduct a thorough investigation of what breach has occurred. Collect all proof that you have regarding the violation by the employee. What type and how much harm can it cause to the company.

A former employee’s computer is the best place to look for any proof of violations, and a computer forensic expert’s help can be sought to find out the same.

It is advisable to send a cease and desist letter before proceeding for legal action. A cease and desist letter requires the employee to stop all activities harmful to the previous employer and demands immediate compliance.

Litigation

Take this route if you determine significant harm to your business. Litigation is costly so ensure that you have full proof to back your claims of breach.

The aim should be to get immediate inductive relief in terms of stopping all harmful activities. Keep in mind where you want to file the lawsuit ( which court jurisdiction) and whether to name the new employer as a co-defendant.

It is better to come to a mutually beneficial agreement as court cases are costly, lengthy. And if one cannot produce concrete evidence or the state law leans in favor of public policy and employee rights, then chances of finding a satisfactory outcome are slim.

Full disclosure and competent Legal advice

A new employer hiring someone from a competitor should find out any details of a non-compete agreement that the employee has signed earlier.

Get a lawyer or in-house counsel to review the NCA for any liability on you and post-employment restrictions. Tortious interference, aiding and abetting breach of fiduciary duty, and misappropriation of trade secrets are some of the issues that should be covered to avoid any litigation.

Indemnity

A new employee can seek to indemnify himself against any future litigation. It depends on the new employer, whether they are willing to take such a commitment. One can ask the future employee to get it done independently, which exempts an employer from any monetary obligation in case of future litigation. Or if the employee is valuable enough, agree to indemnify the prospect on the condition that the information given is legal and not fraudulent.

Also, good legal advice from a competent authority by the employee also saves him or her signing anything that may prove harmful in case of any litigation. It helps to check that the agreement is balanced and in favor of both parties.

Cease and Desist Notice

If an employer is served such a notice despite all precautions, then it is prudent to comply. Send off an acknowledgment in the most polite terms assuring of stopping any inadvertent breach of conduct.

Keep the negotiations open and preserve the notice as it is required by law and is treated as evidence of notice.

Defense against NCA

As long as the terms of the non-compete are termed as “reasonable” most state laws uphold them. But there are some defense tactics that come in handy—like the geographical or time limits are too broad and extensive. The NCA is unnecessary and in no way hinders the former employer’s business activities. Some states intervene to make the NCA more reasonable. That is, a court can tailor, modify an overly broad-based NSA to make it more equitable. It is called the “blue pencil rule.” On the other hand, any hardships caused to a new employee or employer under an NCA is nullified.

Priyansha Mistry
Priyansha Mistry
Currently editor at The HR Digest Magazine. She helps HR professionals identify issues with their talent management and employment law. | Priyansha tweets at @PriyanshaMistry

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