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Protecting Your Business Interests with a Non-Competition Policy
By Sylvia A. Ezenwa, JD 
In today's marketplace, employee turnover is on the rise, and it can have serious financial consequences for employers who fail to take steps to protect their business interests. Suppose that you, an O&P facility owner, hire a sales representative to provide your customers with technical support, product information, and training. To perform effectively, the sales representative will need access to confidential and proprietary company information, including a customer list and marketing strategy. But what happens when the sales rep is fired or resigns, and then accepts a similar position with a competing facility? Might she continue to use your customer list and marketing strategy to sell her new employer's products? The possibility of a former employee transferring to a new employer her knowledge of the former employer's legitimate business interests, such as "software designs, customer base, marketing strategy, business practices, and other sensitive information revealing the strengths and weaknesses of . . . products,"
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is a real concern for businesses—one that every employer should address by developing a workplace non-competition policy. This article shows you how.
How to Develop a Non-Competition Policy
Ideally, a non-competition policy should consist of two parts: (1) a non-competition agreement, also referred to as a "restrictive covenant" or a "covenant not to compete"; and (2) an in-house seminar to educate new employees about the agreement.
Part 1: The Non-Competition Agreement
A non-competition agreement "is an agreement to prevent an employee from engaging in activities that actually or potentially compete with the employee's former employer."
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A non-competition agreement can either stand alone, or else be a single provision in a larger employment agreement. Typically, when a non-competition agreement is used, every new employee will be required to accept and sign it before being hired. Nonetheless, a newly hired employee, who willingly signs a non-competition agreement at the start of her employment, may still—after leaving her employer—file a lawsuit claiming that the agreement is unreasonable, and asking a court not to enforce it.
Generally, courts are reluctant to enforce non-competition agreements because they are "restraints on trade" that tend, or are designed, to eliminate or stifle business competition in our free market economy, and may even result in a monopoly for a few employers in a particular industry.
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And since they are "disfavored restraints on trade, the employer bears the burden of proof [in court] and any ambiguities in the contract will be construed in favor of the employee."
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Simply stated, if the validity of a non-competition agreement is challenged by an employee in court, the employer will have to convince the court that the agreement is reasonable; and if the agreement is unclear in any way, it is the employee—not the employer—who will be given the benefit of the doubt.
Despite their reluctance, courts will and do enforce non-competition agreements that are fair and reasonable; each agreement is evaluated on its own merits, and the provisions of an agreement are balanced with the circumstances of the businesses and employees involved.
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Specifically, a court will attempt "to strike a balance between an employee's right to secure gainful employment and the employer's legitimate interest in protection from competition by a former employee based on the employee's ability to use information or other elements associated with the employee's former employment."
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To better strike that balance, courts have developed certain criteria for determining whether to enforce a non-competition agreement: "A non-competition agreement between an employer and an employee will be enforced if the contract is narrowly drawn to protect the employer's legitimate business interest, is not unduly burdensome on the employee's ability to earn a living, and is not against public policy."
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Therefore, any employer who uses a non-competition agreement must be sure that it satisfies the following criteria:
(1) Protects legitimate business interests
To satisfy this criterion, a non-competition agreement should be no greater than is necessary to protect an employer's legitimate business interests.
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The agreement should only prohibit employees from competing directly with their former employer or taking a similar position with a direct competitor.
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For instance, a reasonable, and therefore, enforceable agreement might prohibit a former sales employee from accepting a position with another company selling medical equipment similar to that sold by her former employer.
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(2) Does not unduly burden employees
To satisfy this criterion, a non-competition agreement should not be unduly harsh and oppressive in curtailing a former employee's legitimate efforts to pursue a livelihood.
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The agreement should be limited, not only in terms of function (i.e., to protect an employer's legitimate business interests from direct competition), but also in terms of geographic scope and duration.
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The smaller the geographic scope of the agreement (e.g., a city, county, or mile range), and/or the shorter its duration (e.g., six months or one year), the more likely it is to be enforced.
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For instance, a reasonable and enforceable agreement might prohibit a former employee—for six months after leaving her employer—from becoming associated with any business that competes with the former employer.
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Meanwhile, an unreasonable and unenforceable agreement might prohibit a former employee—for three years—from working for any business in the same industry (including non-competitors) as the former employer.
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(3) Reflects public policy
To satisfy this criterion, a non-competition agreement should reflect a sound public policy.
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"Public policy" refers to the common sense and common conscience of a particular community as applied to matters of public health, safety, welfare, and morals.
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If an agreement satisfies the first two criteria, i.e., it protects legitimate business interests and does not unduly burden employees, it likely will be considered reasonable and enforceable.
Part 2: The in-house seminar
A non-competition agreement is only half the battle; in order to minimize the risk of employee lawsuits, every new employee should be educated about the agreement before being required to sign it. A cost-effective means of employee education is by conducting regular in-house seminars for groups of new employees, at which human resources personnel should:
- Discuss the function, geographic scope, and duration of the non-competition agreement.
- Clarify the restrictions the agreement might place on an employee's ability to earn a living after leaving the employer.
- Require each employee to sign the agreement as a condition of employment.
- Require each employee to sign an attendance sheet at the conclusion of the seminar.
And if a lawsuit is filed, a signed non-competition agreement and seminar attendance sheet can be used by an employer to help refute a former employee's claims that she was unaware of, or did not understand, the agreement that she signed.
Conclusion
Unlike in past years, employees change jobs more frequently, moving from employer to employer, often within the same industry; and transient employees could transfer sensitive information about a former employer's products and services to direct competitors, thereby undermining the former employer's profitability. As an employer, the best way to forestall harmful information transfers and protect your business interests is by developing a non-competition policy—today.
Copyright 2006 Sylvia Ezenwa. Reproduction of any portion of this article in any form is prohibited without the expressed, written consent of the author. Sylvia A. Ezenwa is a lawyer, author, and freelance writer based in Superior, Colorado. She is licensed to practice law in the State of Texas. She writes legal articles for trade and consumer publications
References
Systems and Software Inc. v. Barnes, No. 2004-401, 2005 VT 95 ¶ 11. Omniplex World Servs. Corp. v. US Investigations Servs. Inc., 270 Va. 246, 249 (2005). See Black's Law Dictionary 1314 (6th ed. 1990). Omniplex World Servs. Corp. v. US Investigations Servs. Inc., 270 Va. 246, 249 (2005). Id. Id. Id. Simmons v. Miller, 261 Va. 561, 580 (2001). Omniplex World Servs. Corp. v. US Investigations Servs. Inc., 270 Va. 246, 249 (2005). See Omniplex World Servs. v. US Investigations Servs. Inc., 270 Va. 246, 250 (2005). Simmons v. Miller, 261 Va. 561, 580 (2001). See Id. at 581 See Id. at 581. See Systems and Software Inc. v. Barnes, No. 2004-401, 2005 VT 95 ¶¶ 2, 11. See Omniplex World Servs. Corp. v. US Investigations Servs. Inc., 270 Va. 246, 250 (2005); Simmons v. Miller, 261 Va. 561, 581 (2001). See Simmons v. Miller, 261 Va. 561, 581 (2001). See Black's Law Dictionary 1231 (6th ed. 1990). 
Table Of Contents - March 2006
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