With the downturn in the economy, noncompete agreements have become more difficult to enforce. Think that means no limits? Think again.
Employee noncompete agreements prohibit employees from engaging in conduct competitive with their employers after the employment relationship terminates. In many states, such agreements have historically been the most effective way for a company to protect a company's investment in training, the development of special skills, trade secrets, confidential information and goodwill. Now, that's all changing. In recognition of our currently dismal economy and the need to permit people to work, some courts -- even in states that generally enforce noncompete agreements -- have demonstrated a reluctance to enforce these agreements.
Nonetheless, employees may find that they are no more free to pursue a new job than they were before. That is because most companies can arm themselves with several tools to achieve nearly the same protections that used to be obtained with a noncompete agreement. Given the change in the noncompete enforcement climate, many companies have already begun supplementing their noncompete agreements with such additional tools -- and technology companies are especially likely to do so.
The first step for a company seeking to protect itself with tools beyond noncompete agreements is to conduct a trade-secret audit, a process for assaying the company's trade secrets, confidential information and other protectable interests (such as goodwill) and determining how each may be misappropriated. Once all such assets are identified and valued and the risk of their loss has been assessed, the company designs and implements a comprehensive protection program, typically involving some combination of written agreements (called "restrictive covenants"), written policies concerning the appropriate use of company information, defined security measures and a detailed enforcement scheme, including not only enforcement of each of the applicable agreements, but also reliance on both established and novel legal claims and theories.
The standard restrictive covenants are as follows:
- "Garden leave" clauses: A type of noncompete agreement that compensates an employee during the period that the employee's competitive activities are restricted. In a traditional garden leave clause, the employment relationship technically continues during the restricted period. However, the legality of such an obligation remains dubious.
- Forfeiture-for-competition agreements and compensation-for-competition agreements: Agreements by which an employee either forfeits certain benefits or pays some amount of money if he engages in activities that are competitive with his former employer.
- Forfeiture agreements: Agreements by which an employee forfeits benefits when his employment terminates, regardless of whether he engages in competitive activities.
- Nondisclosure/confidentiality agreements: Agreements by which an employee agrees not to use or disclose an employer's confidential information.
- Nonsolicitation agreements: Agreements by which an employee agrees not to solicit -- and, if well drafted, not to accept -- business from the employer's customers.
- Antipiracy agreements: Agreements by which an employee agrees not to solicit -- and, if well drafted, not to hire -- the employer's employees.
- Invention assignment agreements: Agreements by which an employee assigns to the employer any potential inventions conceived of during employment.
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