Opinions and Legal Insights

HOW TO MANAGE THE RISK OF UNFAIR COMPETITION BY FORMER EMPLOYEES

Employers face a known but largely unquantifiable risk when they give their employees access to their confidential or proprietary information, trade secrets, and customers.  Some ignore these risks, hope for the best, and trust that they have hired only loyal, honest, and honorable workers.  Such employers basically risk the loss of critical assets and the success of their business in the fickle hands of their employees.  The same workers whose personal career experience or that of spouses, relatives, or friends has taught them because of repeated reorganizations and their attendant reductions-in-force to doubt the loyalty of employers.

In view of this dilemma, prudent employers take pro-active steps to safeguard their intangible assets.  They use agreements with their workers to protect their confidential or proprietary information, trade secrets, and customers’ good will.  To that end, they enter confidentiality and nondisclosure agreements and non-competition agreements with their employees.  To achieve the desired results, such agreements must avoid the inadequacies and pitfalls that make them unenforceable.  The past experience of other employers who have litigated and lost lawsuits to enforce restrictive covenants shows how employers can make these types of agreements work for them to protect their assets.

1. Non-Competition Agreements Must Have Consideration.

Frequently, employees sign non-competition agreements at the beginning of their employment with the employer.  Typically, the employer hires the employee for no specific duration on an employment at will basis.  Some courts view the hiring of the employee to provide consideration for a non-competition agreement.  Recently, however, a federal district court in Missouri held that a non-compete agreement that an employee signed at the beginning of his at will employment lacked consideration, which made it unenforceable.  The concept of consideration involves a valuable exchange between the parties to an agreement.  The court reasoned that an employer that offers at will employment to an employee makes no legally enforceable promise either to do or to avoid doing anything that it cannot already do.  In an at will employment, the employer reserves its right to terminate the employee immediately for any or no reason.  Therefore, employers should cite not only the employer’s employment of the employee as consideration for the non-competition agreement, but also some additional form of consideration, such as a lump sum signing bonus of say $100.00 to $500.00.

Similarly, during an employee’s employment, changes in job duties may cause an employer to request an employee to sign a non-competition agreement.  In that case, if a raise accompanies the change in job duties, then the non-competition agreement should cite the pay raise as consideration for the agreement.  Sometimes, however, a change in the employee’s compensation that occurs simultaneously with her signing a non-competition agreement may or may not increase her pay.  For example, the employee may transfer from a staff or production job paid on an hourly or salaried basis to a sales position paid on a commission basis.  To assure the enforceability of the non-competition agreement in that instance, the agreement should recite some additional consideration beyond the change in job duties and compensation.  For instance, the agreement should identify not only the change in job duties and compensation, but it should also include either a small bonus payment or the employee’s eligibility for something else of value, such as an additional personal day off with pay.

In addition, suppose the employee has signed a non-competition agreement earlier in her or his employment in a commission sales position.  If the employer later changes the employee’s commission plan, then the employer must have the employee sign a new non-competition agreement before the new plan takes effect.  The new agreement must cite something more than the employee’s continued at will employment as consideration.  For instance, it could identify a small signing bonus or the worker’s eligibility for something else of value, such as an additional personal day off with pay, as the consideration for the new non-competition agreement.  The employer’s failure to require the employee to sign a new agreement that recites additional valuable consideration beyond continued at will employment when it changes the commission plan could render the non-competition agreement unenforceable.

2. Non-Competition Agreements Must Restrict a Former Employee’s Competition for No Longer than a Reasonable Period.

Generally, the law favors free enterprise and competition.  It makes a limited exception to the general rule to prohibit competition for only a time period long enough for the former employer to protect its legitimate business interests.  Courts refuse to enforce non-competition agreements if they forbid a former employee’s competition for too long.  In Missouri, courts have regularly enforced such restrictions against former employees for periods ranging for six to 24 months.    Wise employers impose prohibitions against competition against former workers for periods no more than the longer of the duration of the former employee’s employment with the employer or 24 months.

3. Enforceable Geographic Restrictions Can Limit Competition Only in a Reasonable Geographic Area.

As with the duration of non-competition agreements, the law allows geographic restrictions on competition, but only in reasonable geographic areas.  For example, presume a sales employee had a sales territory consisting of five counties.  In addition, suppose his non-competition agreement prohibits his post-employment competition against his former employer in a nationwide geographic area.  Courts would universally refuse to enforce the non-competition agreement because of its overbroad geographic restrictions on the former employee’s competition.  The law supports the enforcement of only reasonable geographic restrictions, such as a restriction in the five counties comprising the former sales representative’s sales territory during his employment with the employer.  In each case, the facts and circumstances of an employee’s sales territory during her or his employment will determine the reasonableness of the post-employment geographic prohibition against competition that courts will enforce.

4. Customer Non-Solicitation Agreements Effectively Prohibit Competition without Regard to any Geographic Scope of the Prohibition against Competition.

Some non-competition agreements also include customer specific non-solicitation agreements.  These provisions typically prohibit a former employee from soliciting any customers with whom the employee interacted directly during her or his employment for a stated period of time after her or his employment ends.  If the restricted period involves a reasonable period, courts enforce such non-solicitation agreements.  In Missouri, courts have generally enforced such customer non-solicitation agreements for periods ranging between six and 24 months.

Astute employers typically include both customer specific non-solicitation agreements and non-competition agreements in their agreements that impose post-employment restrictive covenants on their workers.  If a sales representative sold to some customers scatter throughout the far regions of the world, but mostly to customers in a given metropolitan area, a court would likely enforce a prohibition against the employee’s competition in a geographic area comprising that metropolitan area.  In that case, the customer specific non-solicitation agreement would enable the employer to enforce the customer specific non-solicitation prohibitions throughout the far regions of the world beyond the metropolitan area.

5. Employee Non-Solicitation Agreements in Missouri Presumptively Have a Maximum Reasonable Period of One Year after the Former Employee’s Employment Ends.

An employer may also enforce non-solicitation agreements that prohibit a former employee from soliciting the employer’s employees.  A Missouri statute generally limits the duration of such restrictions to the one-year period after the former employee’s employment ends.  Only if an employer can prove the existence of special circumstances justifying a longer period for the restriction can a court enforce such an employee non-solicitation agreement for a period longer than one year.  In other states, courts will enforce employee non-solicitation agreements for a reasonable period after the former employee’s employment ends.  Keep in mind, however, that an employer can only enforce such a non-solicitation restriction for the period of time necessary to protect its legitimate business interest.   Presumably, the more time that elapses after the end of a former employee’s employment, the less influence the former employee has on the employer’s current employees.  Enforcement of employee non-solicitation agreements more than a year after the former employee’s employment ends generally requires specific evidence of the former employee’s continuing influence over the employer’s current employees.

6. Confidentiality and Non-Disclosure Agreements Protect the Employer’s Confidential Information and Trade Secrets from a Current or Former Employee’s any One or More of Misappropriation, Disclosure, or Use of such Information or Secrets.

Most businesses have confidential and proprietary information, at least, and sometimes trade secrets that a competitor could use to their disadvantage.  The law recognizes the importance of protecting the confidentiality of such information to them.  Businesses that have valuable confidential information and trade secrets should require employees to sign a confidentiality and non-disclosure agreement when the employment relationship begins.   In an at will employment relationship, an employer should avoid any issues as to whether consideration supports such an agreement.  It should, thus, provide any one or more of a signing bonus, an award of a special employment benefit (such as an additional paid personal day off), or some other valuable consideration beyond merely its employing the employee in an at will relationship.  Similarly, if the employer has an employee sign a confidentiality and non-disclosure agreement after the employee’s employment has started, it should recite consideration in the agreement beyond the mere continuation of the employee’s at will employment.  To do otherwise risks a court’s refusal to enforce that agreement.

Unlike non-competition and non-solicitation agreements, courts generally recognize the enforceability of confidentiality and non-disclosure agreements for indefinite periods of time, assuming the information remains either confidential or a trade secret.  Courts, however, refuse to enforce such an agreement where the agreement seeks to protect publicly available information.  For example, an employer’s customer list with customer names and addresses normally lacks the requisite confidentiality, if others in the same industry could replicate the list from publicly available information, such as trade association or industry directories, with relatively little effort.  On the other hand, if a customer list includes not only names and addresses, but also each customer’s buying history or patterns based on its past purchases from the employer, courts would typically find the list to include confidential information and enforce an agreement whose definition of confidential information includes such a customer list.  Similarly, courts generally consider the current relevancy and value of the confidential information.  They enforce confidentiality and non-disclosure agreements whose definition of confidential information includes current marketing plans, sales plans, and business plans, but refuse to enforce them for former plans after the business has replaced them by the current ones.  Thus, some confidential information has a shelf life and courts will enforce confidentiality and non-disclosure agreements during the information’s shelf life but not afterwards.

Generally, a confidentiality and non-disclosure agreement should include a definition of confidential information specific to the employer’s business. It should include the following types of information in that definition:

(a) trade secrets,

(b) information that gives its business a competitive advantage,

(c) information that if disclosed, would likely harm its business, and

(d) information that makes the business’ product or services unique.

When defining confidential information, an employer should also consider whether:

(i) persons outside its business know the information,

(ii) employees and others involved in the employer’s business know the information,

(iii) the employer takes steps to keep the information confidential,

(iv) the value of the information to the employer and its competitors,

(v) the employer’s cost and effort to develop the information, and

(vi) the ease or difficulty for others to obtain or to duplicate the information lawfully.

In closing, the first step to an employer’s protection of its confidential information and its customer’s good will involves the effective use of non-competition, non-solicitation, and confidentiality and non-disclosure agreements.  A one size fits all approach to such agreements will likely produce unsatisfactory results.  Instead, employers must use agreements that reflect the reality of their workplaces, so that they impose only reasonable restrictions that a court will enforce.  Similarly, employers must implement confidentiality and non-disclosure agreements that realistically define the confidential information that the agreements protect.  Again, a court convinced that the agreement protects truly confidential information from unauthorized use will likely enforce the agreement.  Agreements that overreach in their restrictions on competition or definitions of confidential information typically produce unsuccessful enforcement actions.  To implement agreements that achieve the desired results of protecting the confidential information and customer good will, employers should consult with a labor and employment lawyer.  For more information about non-competition, non-solicitation, or confidentiality and non-disclosure agreements, please contact Gerry Richardson, (314) 552-0453, grichardson@evans-dixon.com.