You have trade secrets, and keeping them out of the hands of your competitors is critical to your business. But with ever-changing laws, not to mention recent criticism levied at noncompetes, are they still the best way to go? We asked experienced attorneys for advice. Here’s what they said.
“Noncompetes sound like a great idea for startups [because] they allow you to prevent employees who leave from taking the knowledge and experience they gained at your company and using it somewhere else. But the devil is in the details. Many jurisdictions view noncompetes negatively, because they don’t want contracts to stop people from getting work after they’ve left a job. States like California completely disregard any kind of noncompete language. Other states take a different approach, allowing noncompetes as long as they are reasonable. This generally means that noncompetes last for less than two years, are narrowed down to just other companies that directly compete with you, and apply only to a reasonably small geographic area. Even so, I recommend checking with the local state laws and court precedent to see what counts as ‘reasonable’ and whether noncompetes are even recognized at all!”
Zachary Strebeck is an attorney who works with video game and software startups at Zachary Strebeck Law
“Companies often require their employees to sign restrictive covenant agreements that include noncompete, nonsolicitation and confidentiality clauses. A noncompete prohibits a former employee from working for a competitor, while a nonsolicit typically prohibits a former employee from soliciting customers or employees, and a confidentiality agreement prohibits the disclosure of confidential information. The Obama administration estimated that about 18 percent of American workers are covered by a noncompete agreement, about 37 percent of American workers have worked under such an agreement at some point in their careers, and about 14 percent of American workers making less than $40,000 a year are subject to a noncompete. Congress recently passed the Federal Defense of Trade Secrets Act, which prevents the misappropriation or misuse of a trade secret. Many states also have their own trade secrets act.
“Because noncompete agreements impact the marketplace, courts carefully scrutinize these agreements. Due to the potential harm to both the company and the employee, these situations are often expedited, so noncompete cases proceed very quickly. To determine whether a noncompete is enforceable, judges evaluate several factors, which vary by state. These factors include how long the employee worked for the company and whether the employee received enough of a benefit for the noncompete, how broad the noncompete is in terms of time, geography and the restricted activities; the types of clients the company [has]; and the employee’s access to confidential information.
“Companies concerned about protecting their vital information should craft creative agreements that evolve with the law and have strong remedies. Businesses should also determine their goals to help shape their agreements. Is the goal to prevent competition generally or with a specific entity? Is there a concern about losing clients or employees? And what do the restrictions indicate about the business to potential employees, clients and the general public? The answers to these questions can help companies determine the right agreement to protect their business.”
Amit Bindra is a partner and employment law attorney at the Prinz Law Firm
“There are better ways to protect your intellectual property. Noncompetes are treated under state business law. This means that what works for a noncompete is going to be different, sometimes extremely different, for each state. In the modern world, where startups often have virtual employees in many different states, this creates problems. The noncompete you write for employees in your home state might not hold up in the state court of your virtual employees. You can try to solve this with choice of law clauses, but these might not always hold up. State courts generally have jurisdiction over people working in their state, even if the companies they are working for are out of the state.
“Patents and nondisclosure agreements, however, are national. The same patent can be used to exclude a company in California or a company in North Carolina. Under the federal nondisclosure law signed by Obama, nondisclosure agreements can also be used across the country to prevent employees from sharing business secrets, even after they leave the company.
“If you use a noncompete, use it only for high-level employees. Courts have taken a dim view of lower-level employees (production line employees, for example) being forced to sign noncompetes. [Also,] the noncompete needs to be reasonable in geographic and time scope (what this means is different for each state)—a noncompete covering the entire world and all time will not work.”
Daniel W. Cole is an intellectual property lawyer and patent attorney with Olive Law Group
“One of the most common mistakes startups make when instituting noncompetes relates to timing. Generally speaking, noncompete agreements (and other restrictive covenants) must be supported by consideration to be enforceable. When hiring a new employee, the offer of employment provides the necessary consideration to support the noncompete agreement. But startups often neglect to use employment agreements of any kind early on, so it’s common for a startup to present noncompete agreements to employees after they’ve already been working there for some time. When this happens, it’s imperative for the startup to offer additional consideration—usually in the form of a salary increase, bonus or promotion—to ensure the noncompete is enforceable. The promise of continued employment is not sufficient consideration to support the noncompete.”
Mark Tyson is the founding attorney of Tyson Law, a business law firm
“Startups working with proprietary technology should include confidentiality and nondisclosure provisions in their employee contracts in addition to company policies. Many courts do not look favorably on noncompete provisions, and even when they are included, there usually must be limitations on scope, geographical area and how long the company expects the noncompete period to last. Courts will also look at whether there is additional compensation as consideration for the noncompete.”
Caroline Conway practices business and family law at The Law Office of Caroline A. Conway