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Category:
Published: February 2008
Non-Compete Agreements
Preventing A Departing Employee From Running Off With Your Customers
This situation is not uncommon. An employee works for you for a few years learning the ropes of your business and then sets out on his or her own to start essentially the same business.The employee has a relationship with many of your customers and now wants them to be customers of the new business the former employee is starting. Can you prevent this, especially in an economy which values free enterprise as one of its hallmarks? The answer lies in planning ahead for such contingency, done through a non-compete agreement.
A non-compete agreement is a written and signed acknowledgment, typically signed when an employee is hired, which can say that the employee is forbidden from working directly or indirectly with any business competitors within a limited radius such as 50 or even 100 miles and for a limited time frame, maybe within one year of leaving your business. The agreement also holds that the employee, upon leaving your business, is forbidden from soliciting customers of the business. Do not expect the agreement to be binding, however, unless it clearly enunciates rationales for such restrictions, the basis of which must be to essentially protect your business model from being usurped by a former employee. Contracts which tend to prevent an employee from pursuing a similar vocation after the termination or withdrawal of employment are generally disfavored in the law and will not be enforced unless necessary to protect trade secrets, customer lists, a business model or goodwill of the employers business. A good non-compete agreement will thus reference that the employee has had access to confidential information, business plans or models, trade secrets of the business which the employee has agreed to hold in confidence including after such termination. Such trade secrets can include marketing techniques, development plans, customer names, price lists, pricing policy, sales models or business development ideas. In other words, you are protecting successful business strategies, techniques, or marketing endeavors which you have developed unique to your business.
If you can demonstrate to a court that your business will be harmed by a former employee misappropriating and utilizing proprietary information, you will have a good shot at securing an injunction from a court preventing the same. As such, it is important when an employee comes on board to have the employee sign a non-compete agreement which specifically recites that they will be exposed to various proprietary information, techniques, etc., which the employee agrees to hold confidential and which must remain with your business.
Non-compete agreements are broken every day by disgruntled employees or employees who feel they can do better on their own. The battle to keep your customers and keep your proprietary information is won or lost, really, at the first round of litigation: pursuing a preliminary injunction against the former employee. The former employee is enjoined by a court from engaging in practices contrary to the non-compete agreement. This may include utilization of customer lists, solicitation of any of your customers and interfering with any contractual relationships already existing. A preliminary injunction is granted until the court has had an opportunity to issue a final decision on a permanent injunction. However, if you do not win the preliminary injunction, by the time the court gets around to finally deciding the matter, the cat is already out of the bag and the damage has been done. You have to move immediately. Too often a client will come to me complaining about such activities of a former employee but has waited until the former employees new business is well underway, with the clients customers already lost and an ever uphill battle in trying to prevent the damage that has been done.
To win the preliminary injunction, you must show the likelihood of success on the merits, that you will suffer irreparable harm in the interim before a final legal adjudication and, finally, a balancing of the equities in your favor. You have a burden of demonstrating your customers are not otherwise known in the trade or that they are discoverable only by extraordinary efforts. However, the willful solicitation of business customers contrary to a non-compete agreement is actionable and can make one liable for reduced sales to that particular solicited customer or the opportunity for profit on additional sales, among other damages. This is distinguished from your business customers which have not been solicited by the former employee but who have, rather, voluntarily decided to approach the former employee and engage in a new business relationship. Unsolicited customers are often viewed by the court as free game.
When pursuing the preliminary injunction, typically an undertaking is needed, essentially posting an amount which will cover the damages and costs which may be sustained by reason of the injunction should you not prevail via permanent relief. The court will determine the amount. More importantly, however, if the defendant, your former employee, eventually defeats the preliminary injunction, he or she will not only get damages by reason of your preliminary injunction, but also will secure the attorneys fees necessary to defend the action. While an injunction is a powerful remedy, it can have powerful consequences if misused. You need to line up your proof: specific facts and documentation, affidavits from witnesses, demonstrating to the court how your proprietary information has leaked out or has been misappropriated. The case law is very fact specific and often seems to produce contradictory results. One thing you can expect is that court enforcement will be for a limited time or perhaps for a limited service area. That, however, might be all you need in that if you can secure the preliminary relief early. Your former employee, and now your business competitor, is not going to be able to get off the ground, at least in your locale, and will probably be compelled to move elsewhere.
© 2008 All Rights Reserved.
This article is for illustrative purposes only. You should consult your own personal attorney in any legal matters.
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