Noncompete Agreements

By definition, trade secrets carry a competitive advantage. They provide a company with an economic benefit, and they are not told to others because those others might create competing products or services. However, trade secrets and sensitive business information must be disclosed to certain employees and other companies in order to carry out the business of a company. When employees who possess your trade secrets leave, they may take your secret and use it for their personal advantage by opening a competing business or by working for a competitor who uses your secret. Many businesses use carefully drafted noncompete agreements, in conjunction with a nondisclosure agreement, to protect their trade secrets from being misappropriated by the competition. The purpose of a noncompete agreement is to prevent unfair competition.

A noncompete agreement is one in which an employee promises not to work for direct competitors of the employer for a limited term after leaving a company. This means that competitors will not have access to the confidential information you disclose to an employee for a specific period of time, during which time you can exploit the economic benefits of your trade secret.

Many companies would like to keep a trade secret indefinitely. In theory, this is possible unless the company also seeks a patent for the information or invention. Patents require a public disclosure of proprietary information. However, courts usually do not enforce noncompete agreements that leave the term of the agreement open indefinitely.

Noncompete agreements can be enforced in most states, but it is important to be aware that courts highly value an individual’s right to earn a living. Each state has its own laws regarding the circumstances under which they may be enforced. If your business is in California, you should be aware that the state has a settled public policy in favor of open competition, and it has enacted a law that presumptively voids noncompete agreements except in very limited circumstances.

Among the limited circumstances in California are noncompete agreements that are necessary to protect an employer’s trade secrets. However, this is a judicially created exception, under which employers rarely prevail. If you are accused of breaching a noncompete agreement in California, you may have a number of strong defenses. In contrast, if you are accused of breaching a reasonable noncompete agreement in another state, your defenses may be quite limited.

What Makes a Noncompete Agreement Reasonable?

In most states, some general rules apply. An employer should have a good business reason for asking an employee to sign a noncompete agreement.  Usually, the protection of sensitive trade secret information is a good reason. As an employer, it can be helpful to be selective about which employees sign the agreement. You should only ask those employees to sign the agreement who are likely to be exposed to trade secrets.

Moreover, it is important for an employer to establish that signing the noncompete agreement is a prerequisite for receiving the job. An employee who is already employed must be provided some other benefit, such as a promotion in title or a raise, in exchange for his or her signature. If you are an existing employee who is asked to sign a noncompete agreement, you should be aware that you have greater leverage in negotiating your noncompete agreement than you had as a job applicant.

The court must consider the noncompete agreement “reasonable.” Each state has its own nuances when it comes to what courts think is reasonable. In general, a noncompete agreement should be of limited duration and limited geographic range, and it should only prohibit the employee from engaging in a limited number of businesses. Usually, a noncompete agreement that lasts longer than two years is in danger of running afoul of the reasonableness rule. Too many restrictions on an employee will seem to the court like the company is trying to punish him or her for leaving the company.

In general, if you are an employee who has been exposed to trade secrets, it is probably wise to honor a reasonable noncompete agreement that is limited to a short period of time, a specific city or state, and a single business. However, if any of these limitations is extremely restrictive, or if you are in California, you should consult an attorney about other options.