Restrictive Covenants – Protection Against Betrayal

Savvy business owners must protect themselves against betrayal to every extent possible, and the best way to do this is through the use of Restrictive Covenants. Have you ever seen “Julius Caesar,” a Shakespearean play that depicts the brutal betrayal of Caesar by seven of his closest friends?  Well, if not, sorry to spoil the ending.  This tragic historical event illustrates that betrayal by those closest to us is nothing new, and protection is crucial in every aspect of our lives.  One type of protection comes in the form of agreements, or contracts, more commonly referred to as Non-Compete and Non-Solicitation Agreements. These are tools that a business owner can use to put some protections in place. They protect people from having their customers and employees taken from them by their closest associates.

Ensure you have Restrictive Covenants in place to protect your trade secrets.

So, What is a Non-Compete?

Briefly stated, a Non-Compete is an agreement that a business owner would enter into that would restrict a former employee or independent contractor from opening up a business that is like yours.  This might be applicable where you invest time and money training up an employee, and once they gain the knowledge and skills necessary to flourish and do the work independently, they decide to set up their own business that would now be in competition with you.  Or, you are buying a business from someone, and you want to restrict their ability to start up another similar business that would draw the customers away to their new business.

What is a Non-Solicitation?

A Non-Solicitation Agreement, while similar, focuses on preventing someone from stealing your customers or employees away from you.  For example, in the scenario above where an employee decides they want to resign and establish their own business, a major concern would be if they persuade, or solicit, your current customers to follow them to their new business.  Not only would you be losing a valuable employee, but you would also be losing valued customers.  Imagine if they then begin to draw away your employees as well, your good ones that you have been training.  Ouch.  This scenario could have a pretty significant impact on a business.  Something like this actually happened in a recent 10th Circuit case where two executives resigned from a company and took at least 25 employees with them to create a competing business. 

Non-solicitations can be tricky to sort out, especially when considering customers who might take their business and follow a key employee who left your business.  Sometimes customers might really like that employee, and they are willing to follow them wherever they go.  It is possible that the employee did not contact them, and the customer just found out and decided to place their loyalty in that individual employee. So, it can be tricky to prove that the employee actually stole a customer. 

Specific Business Reason

In order to put into place a Non-Compete and/or Non-Solicitation Agreement with your employees and independent contractors, you have to have a specific business reason.  Ask yourself, “What is it that I am trying to protect?”  Some common interests that would likely be upheld as legitimate employer interests are:

1. Trade secrets such as employee knowledge about how you run your business;
2. Client lists;
3. Time and money spent in training an employee, (It is a legitimate concern to invest in employee training and development for them to then leave and use those specialized skills to compete against your company). 

It is important to note that in some states individuals cannot be restricted from leaving your company to work for a competitor. In these situations, there are still protections available to safeguard your trade secrets in the form of Non-Disclosure Agreements.  To give some clarification, Non-Disclosures are direct means that protect trade secrets by limiting current and former employees in their ability to divulge protected information.  Non-Competes are indirect means that protect trade secrets by limiting the former employee’s ability to start their own business that would utilize that information for a reasonable amount of time.  

OK, Let’s Be Reasonable

Each state differs in at least one key aspect of Restrictive Covenants – they have slight differences in their interpretation of what a reasonable Non-Compete or Non-Solicitation Agreement will look like. However, the two basic things to remember about both of them is that they are limited by the timeframe of the Agreement, as well as the geographic scope, or area.  States will differ in how much time and how big of an area the Agreements can cover.  These differences will be based on the courts’ interpretations, as well as if the State legislatures make specific rules. 

In determining whether the timeframe for the agreement is reasonable, a court will consider whether it is necessary for protecting legitimate interests of the employers. It cannot be unduly oppressive to the person that it restricts. The courts seek to strike a balance between the interests of the business owner, and the other person who also has a legitimate interest in making a living.  Utah state law imposes a relatively small timeframe of one year for a post-employment restrictive covenant.  That means that any restrictive covenants in Utah that extend beyond a year from the date of the employee’s last day of work will be void if challenged in court.  An exception to this one-year rule applies to a reasonable severance agreement, where the court would look to common law to determine what a reasonable time period might be.  Jurisdictions may differ in this determination.

What about the Geographic Scope?

The geographic scope, or area, of the restrictive agreement also has to be reasonable.  This determination is based on the specific details of your business reach.  The court expects these agreements to simply secure reasonable protection.   It might be confined to a particular city, or maybe the county or state, or perhaps your business reaches across international boundaries.  Each business will be a little different, and a court will look at the specific facts to determine where your company is located and is seeking business. 

Why Should We Put These in Writing?

So why do we need these Restrictive Covenants in writing? Well, most importantly it makes it easier to protect your business assets. It is going to be much harder to prove foul play if an employee or independent contractor steals your clients or trade secrets and you don’t have any contracts in writing. It gets messy and it costs extra money because now you have to hire attorneys and go through the whole litigation process proving that they actually stole your trade secrets and used them inappropriately. Not only that but you have to be able to prove that it ultimately affected you in a negative way. If you can put it in writing, you are steps ahead in protecting your business. Once you get these contracts written up, having your employees sign them is key to protecting your assets and business.