Top Ten Things To Think About When Drafting A Non-Compete
You started your business on a shoe-string but you’ve worked hard and built it up. Now you’re at the point where you’re ready to take on other people to help shoulder the work. You’ve interviewed several candidates you think have the potential to become true partners as you take your company to the next level. But then you think, “What if it doesn’t work out?” Your mind starts racing. “What if I invest in this new employee, provide expensive training, share my business model, provide access to my hard-won customers, and then he/she leaves to go to my competitor? Or decides he/she can hang up his own shingle?” So you decide to make the prospective employee sign a covenant against competition. If you go that route, there are a number of pitfalls that you need to avoid. American judges don’t like non-competes because they are a restraint on free trade. Courts will enforce them but they have to be fair and reasonable or your non-compete agreement won’t be worth the proverbial paper it’s written on. Here are the “Top Ten” things to keep in mind.
- New employee. If you think you need the protection of a non-compete, make it part of the hiring process. Once an employee has begun work, the employer must provide some additional value in exchange for the employee’s promise not to compete when the employment ends. When the agreement is hammered out at the beginning, no consideration beyond the job itself is necessary to support the agreement.
- Geography. You may want to make the new employee agree not to compete with you in the same galaxy but non-compete agreements must be reasonable. Consider how far your most distant customer is. Pushing the envelope beyond that distance is dangerous. Try to match the non-compete zone to your company’s footprint. Pick a radius to be drawn from each place where you do business. The reasonableness of the length of the radius will vary with each business. If it’s more appropriate, you may specify a city, or a county or other defined region but be prepared to show that you have customers to protect in the territory you’ve identified.
- Duration. As with geography, you need to pick a time period that is reasonable. You may wish to prevent the employee from competing till the rocks melt with the sun but judges will take a red pen to your agreement. Again, the time period varies with the nature of the employer’s investment. In some businesses, a year is appropriate; in others, two years might be reasonable. Pushing it past two years is difficult.
- Activities. The activities that are prohibited must be spelled out clearly and in detail. If any ambiguity exists, the law requires the Court to interpret the agreement in favor of the employee. Accordingly, you must state exactly what your new employee cannot do in the event the employment ends. In this regard, it’s a good idea to define what your competitors look like—without naming them. You don’t want your employee to have any wiggle room.
- Injunctive relief. An injunction is an order from the Court that, in this case, would require your employee to refrain from violating the contract. If the employee continues to violate the agreement, the Court can punish the employee via its contempt powers. Your agreement should require the employee to agree to the things you would otherwise have to prove to the Court. For example, the agreement should specify that the employee understands and agrees that if he were allowed to compete with the employer during the time and in the locale specified, you would suffer “irreparable harm,” i.e., harm that could not be remedied by mere dollars and cents. By having the employee agree to the elements you would have to prove, you avoid much of the risk of litigation and make it much less expensive.
- Damages too. Your agreement should also specify that you are entitled to damages. I know what you’re thinking, that I just said the employer has to prove “irreparable harm” to get an injunction. True enough, but your employee will have violated the agreement for some period of time before you get a chance to persuade a judge to give you the injunction. In many cases, you won’t know that your employee has been unfairly competed for some weeks or months. Your agreement should state that while you are entitled to injunctive relief going forward, you are also entitled to compensatory damages for the unfair competition that occurred before you obtained the injunction.
- No Bond, thank you. Before an injunction takes effect, the Court has to specify a bond. The bond is a surety that can be used to compensate the employee if it later turns out that the Court should not have issued the injunction. You don’t want to have to pay a bond to get the benefit of the bargain you made with the employee. So put that in the agreement: the employee agrees that no bond is necessary to make the injunction effective.
- No cherry-picking, if you please. While we’re making the employee promise not to compete, you ought to make him promise not to hire away your employees. You don’t want to come in to work and find out that your ex-employee has made your secretary a better offer to come work for him five miles away.
- Re-start the clock. Five hundred years ago, Hamlet complained about “the law’s delay.” Courts try to work quickly when it comes to temporary restraining orders but things still take time, more time than you probably like. By the time you get your injunction, your former employee may have been improperly competing for six months. It’s only fair that that six months not be counted against the non-compete period in your agreement. Unfortunately, that’s exactly what will happen unless you put language in the agreement that will re-start the non-compete period.
- Attorney fees. In the absence of an agreement or statute, American litigants have to pay their own attorney fees. You can change that by putting it in your agreement. You can provide that the “prevailing party” gets an award of attorney fees from the other side. You can even specify that the employee has to pay your attorney fees but not vice versa. That sounds harsh but the employee is the one violating the agreement. But you won’t get fees unless it’s in the agreement.
Lastly, the employer has to keep his nose clean too. An injunction is what Courts call “equitable relief.” The goal is fairness. If the employer has violated the employment agreement is some way—e.g., not paying a promised bonus—the Court may deny a request for an injunction. The Court is going to look at the conduct of both parties.
If you would like more information about these issues, please contact Scott Thomas. Scott has secured victories for firm clients both seeking and defending claims for injunctive relief in Ohio and Kentucky courts. He welcomes the opportunity to work with you on your case. His direct line is 859.578.3862. You can email him at [email protected]. If there is a particular topic you would like to see addressed in a blog, please send Scott an email with your ideas.
Hemmer DeFrank Wessels, PLLC serves clients throughout Kentucky, Ohio, Indiana and New York, including the cities of Cincinnati, Covington, Florence, Ft. Wright, Newport, Erlanger, Independence, Highland Heights, Park Hills; and the communities of Greater Cincinnati, Northern Kentucky, Kenton County, Boone County, Campbell County, Grant County, Hamilton County, Clermont County, Warren County and Butler County.