Non-competition Agreements: How Can They Protect Your Business?

Non-competition Agreements: How Can They Protect Your Business?

Date: 5/10/2005

Author: Solomon, Steiner & Peck, Ltd.

The job market has changed significantly over the past fifty years and employees no longer work for the same employer for their entire careers. Many change employers, even professions, several times during their careers. This increased mobility of employment can create serious problems for employers seeking to protect trade secrets, confidential information, and goodwill. The effect of disclosure of trade secrets or customer solicitation can be devastating, which is why non-competition agreements are so crucial to the vitality of a business.

To accomplish protection, more and more employers are having their employees enter into non-competition agreements. In a non-competition agreement, the employee agrees that he or she will not reveal trade secrets, solicit customers, or work in a similar position within a geographic area whereby the employee would have an opportunity to compete with the employer. Under the protection of a non-competition agreement, an employer will not feel restricted in its right to terminate an employee for fear that information gained by a terminated employee will be used against it.

Can a current employee enter into a non-competition agreement?

As in any binding agreement, there must be adequate consideration exchanged by both parties, meaning each party must give something of value to the other. Prior to a recent decision by the Ohio Supreme Court, non-competition agreements needed to be executed at the commencement of employment or an employee signing the non-compete agreement while currently employed needed to receive some sort of additional compensation. The Ohio Supreme Court recently found that mere continuation of employment is sufficient consideration to enforce a non-competition agreement. This means that employees can be bound by the terms of a non-competition agreement where the only thing the employee receives in return is another day on the job. Under this decision, an Ohio employer seeking to enter into a non-competition agreement with a current employee may do so without offering that employee any specific incentive.

How are non-competition agreements enforced?

Non-competition agreements are only enforced if they protect a legitimate business interest of the employer. Protecting confidential information from disclosure, preventing a former employee from soliciting customers of his or her former employer, and protecting goodwill have all been upheld as "legitimate business interests".

In addition to protecting only "legitimate business interests", non-competition agreements must also be reasonable. Courts consider whether the amount of restraint imposed by the non-competition is greater than necessary to protect a legitimate business interest and whether the level of restraint unduly inhibits the employee's right to earn a living. The determination of reasonableness is centered on three common factors: geographic scope, duration, and type of activity restricted.

What is a reasonable territorial restriction?

There is not a clear-cut territorial restriction standard to which all non-competition agreements must follow. Rather, courts weigh the circumstances of each non-competition agreement on a case-by-case basis. Generally, the geographic range of the non-competition agreement is reasonable if the territory restricted is the area in which the employee in fact performed work or established contact with the employer's customer base. However, the restricted area may be increased if the employer can demonstrate such a need.

For instance, a non-competition agreement restricting the employee from competition with the employer in northwest Ohio will be enforceable for a sales company whose customer base is primarily in northwest Ohio. However, a restriction in all of the United States may be found too restrictive, unless the employer can demonstrate need for such an expansive restriction.

How long can non-competition agreements last?

Much like territorial restriction, there is not a specific time limit. Instead, Ohio courts will consider several factors when determining whether the time restriction is reasonable. First, the time restriction cannot be any longer than necessary to protect the interests of the employer. Second, the duration of the agreement cannot be unduly burdensome for the former employee to earn a living. Finally, courts consider whether the duration of the agreement is contrary to public policy. If the restriction deprives the public of important services for an inordinate amount of time, it is against public policy.

What can I restrict my employees from doing?

A valid non-competition agreement can only bar the former employee from activities that are similar to those performed for the past employer. Moreover, the restriction should be limited to activities that will put the former employer at a competitive disadvantage because of the employee's usurpation of good will or use of trade secrets. A well-written non-competition agreement will define the activities in which an employee is prohibited from performing elsewhere and may include a specific definition of restricted customers.

Practically Speaking

Non-competition agreements are an essential tool to protect trade secrets, confidential information, and goodwill. All of which are developed at considerable expense over a period of time. With the protection of a non-competition agreement, an employer can make optimum use of its employee's skills and talents by including employees in important and confidential business operations, with the assurance that the employee will not leave and use trade secrets and other business confidences elsewhere for a reasonable period of time.