Good Neighbors. Great Lawyers.

Noncompete agreements: a form of business insurance

By Johns, Flaherty & Collins SC on Monday, December 19th 2011

It's ironic that one of your business's greatest assets can also be one of its greatest threats. Key employees--those who have expertise and knowledge that is critical to your operations--can certainly help your business flourish. But when they leave your employ and take your strategic plans, financial information, trade secrets or customer lists to your competitor, they can significantly jeopardize your success.

That's why many companies consider noncompete agreements a form of business insurance: they provide some protection against the loss of highly confidential, strategic, operational, financial and other proprietary information, and they offer some legal recourse should a key employee leave to work for a competitor.

When deciding whether to use noncompete agreements, think about your goals. You must have a legitimate business reason for asking employees to sign these agreements. It's helpful to ask yourself how much such key employees could damage your business if they went to a competitor. Would they have strategic, operational, financial or other proprietary information to share? Could they take your customers, clients or trade secrets with them?

Be selective yet consistent when determining which employees should sign noncompete agreements, and remember they must be used uniformly among employee groups. If, for example, you own an advertising agency and ask an account executive to sign an agreement, be sure to ask all account executives to sign one. But it may not be necessary, or reasonable, to ask support or custodial staff to sign one.

If you want to use noncompete agreements, keep in mind that they must be supported by 'consideration' for the employees who sign them. Consideration means that there must be some financial or other benefit to employees for signing them. If the agreement is introduced at hiring, the benefit for the employee would be employment. If the agreement is being introduced to an existing employee, the benefit may be for a significant promotion or raise.

Noncompete agreements should include three key elements. First, they should place reasonable and clear restrictions on the employee. For example, a key salesperson should agree to return all company materials on termination, including not only customer lists, but also product and pricing information.

Second, they should include nondisclosure language, wherein employees agree not to share information learned from their employment with other employers. That's especially critical when trade secrets, trade practices and patents are essential to your business's success.

Finally, noncompete agreements should include restrictions on subsequent employment, including both narrow geographic and time limitations. A good rule of thumb is that noncompete agreements should be limited to a maximum of two years (depending on the facts of employment) and a 25-mile radius from the employee's primary place of employment.

This last point is where many agreements become unenforceable. Courts strongly disfavor noncompete agreements, and there are statutes that limit their nature and scope, saying they are enforceable only if they impose restrictions that are "reasonably necessary for the protection of the employer." In determining whether your agreement is enforceable, Wisconsin courts will want to see that the agreement allows the employee to continue working in his or her profession elsewhere. The object is to strike a balance between what's necessary to protect the business and the employee's right to work.

It's important to note that in Wisconsin if any portion of a noncompete agreement is not enforceable, then the entire agreement is unenforceable, even the portions deemed "reasonably necessary." So if your agreement establishes standards for termination and you terminate the employee in violation of the terms of the contract, you will be in breach and the entire agreement will be considered unenforceable.

The goal with noncompete agreements should be to protect your business, not to punish employees who leave it. If your agreement is reasonable and fair, you'll have a much easier time getting employees to agree to it as well as getting courts to enforce it.

You may also like:

None at this time