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How to Draft an Enforceable Noncompete Agreement in Five Steps

These five steps aren’t the only considerations in drafting a strong, enforceable noncompete agreement. But, they are a good foundation to placing you in the best position to protect your business from an employee trying to work for a competitor.

August 19, 2013
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According to the Wall Street Journal, litigation over noncompete agreements is rising:

More employers are requiring their new workers to sign “noncompete” agreements, which they say are needed to prevent insiders from taking trade secrets, business relationships or customer data to competing firms when they leave.… 
The number of published U.S. court decisions involving noncompete agreements rose 61% since 2002, to 760 cases last year…. Since most cases are settled out of court and most opinions aren’t reported, that tally is likely low.

Yet, having an employee sign a noncompete agreement and being able to enforce that agreement against that employee are two completely different animals. In today’s job market, courts have become increasingly skeptical of agreements that limit an employee’s ability to find employment.

Thus, what steps can you take to maximize your ability to enforce the agreements that your employees sign? Here are five practical steps.

1. Pick the right type of covenant. What type of competition are you trying to protect? Are you trying to protect your company’s most guarded secrets from you biggest competitors, or are you trying to prevent a salesperson from cherry picking your customers? If all you need is an agreement prohibiting an employee from soliciting customers, clients, or vendors, then limit the agreement to protect that interest. Putting it another way, if all you need is a no-solicitation agreement to protect your legitimate interests, then only require such an agreement as a condition of employment. Do not cast too wide a net, or a court will either narrow it for you, or, worse, toss the entire thing out to sea.

2. Know your jurisdiction. Different states have different laws pertaining to the enforceability of noncompete agreements. California, for example, will only enforce such agreements in very limited circumstances, while Ohio will enforce any agreement reasonable in time, geographical scope, and the legitimate interest you seek to protect. Picking the right state’s law to apply to your agreement could make the difference between an enforceable contract and a worthless piece of paper.

3. Provide consideration. An employee must receive something of value in exchange for giving up the right to compete. If the covenant is signed at the beginning of employment, the hiring itself usually meets this requirement. For current employees, though, what qualifies as “value” varies from state to state. In Ohio, for example, a keeping an at-will employee employed is enough. Other states, however, require something of monetary value, such as a raise, bonus, or extra vacation days.

4. Enforce, enforce, enforce. Do not be selective in enforcing your contracts. Suppose Employee A and Employee B are subject to the same noncompete covenants. Employee A quits and works for a competitor, and you ignore it. If Employee B does the same, but you sue to enforce that noncompete, you will have a hard time proving the legitimacy of the business interest you are seeking to protect in light of the fact that you chose to ignore the same as to Employee A.

5. Ask for help. The Internet is a wonderful tool. A wealth of information is a world away. In the click of a mouse you can learn who led the National League in stolen bases in 1971 (it’s Lou Brock), or you can find examples of noncompete agreements. Be wary, though, of using these examples in your business without first having your counsel vet them. As noted above, laws vary from state to state. They also change from year to year as new statutes are passed, old statutes are amended, and courts pass judgment on various legal issues. No matter the quality of the appearance of the form you locate or the trustworthiness of site on which you find it, you have no idea when it was drafted, which state’s law under which it was drafted to comply, or if counsel ever reviewed it. There is nothing wrong with a little DIY legal work on the Internet. There is a lot wrong, however, with all your legal work being DIY. If you don’t want to pay your lawyer to start from scratch, at least let him or her review your forms and offer an opinion on their viability in your specific jurisdiction.

These five steps aren’t the only considerations in drafting a strong, enforceable noncompete agreement. But, they are a good foundation to placing you in the best position to protect your business from an employee trying to work for a competitor.

Written by Jon Hyman, a partner in the Labor & Employment group of Kohrman Jackson & Krantz. For more information, contact Jon at (216) 736-7226 or jth@kjk.com. You can also follow Jon on Twitter @jonhyman.

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