Noncompete Agreements: Critical IP and Employment Protection
When we hear the term "intellectual property," many businesspeople think first of "hard" IP-patents, trademarks and copyrights. Ideas you know you own because you can hold tangible proof of it in your hands, and you can label it as such when you display it to the world. Certainly doing everything possible to obtain legal protections for those investments is critical to a company's success.
Yet one of the most important ways to protect an organization's IP is with a tool that is often regarded as an add-on to an employment agreement-the noncompete. A noncompete agreement states that, for a specified period of time after an employee leaves a company, he or she cannot work in certain capacities that would compete with the former employer. If your employees have any knowledge or skill you would like your competitors not to have, noncompetes are imperative.
Employers can reasonably choose not to use noncompetes. On a personal level, nobody likes them. Who wants to keep somebody from pursuing a livelihood, particularly in this economy? So an employer might decide from an employee relations standpoint that it is best not to incur the bad press that goes with noncompetes. The worst press of all comes when suing a former employee, who usually is good friends with some key current employees. But most employers who have been burned by a departing employee overcome this particular concern.
Certainly, transitioning from a culture without noncompete agreements to one with noncompetes is difficult. It is perfectly legal in Ohio, though, to demand a noncompete from a current employee and give the employee nothing in return, other than the privilege of coming to work tomorrow.
Also, some employers want to aggressively test their competitors' noncompetes. These employers feel (correctly) that it will be hard to enforce their own noncompetes while at the same time failing to respect their competitors' agreements. This viewpoint is less persuasive. If your competitors have noncompetes and you do not, you remain at a competitive disadvantage-even if the competitors are not successful in fully enforcing the agreements. Your former employees are free to compete; theirs are not.
"They're not enforceable" is not an excuse for not using noncompetes. In most states, the agreements are enforceable to the extent that courts find them reasonable. "Reasonable" is a word seemingly invented to keep lawyers busy, as it means there is no clear line that can be drawn to guide companies in advance of litigation. In general, many employees can be prohibited for one year from doing for a direct competitor what they were doing immediately prior to a separation.
Ohio is a particularly friendly state for former employers enforcing noncompete agreements in court. In contrast, with very few exceptions noncompetes are not enforceable in California. Georgia is another large state that historically has been unfriendly to noncompetes, though a November ballot issue passed by voters should bring that state more into the mainstream.
A more accurate statement is that noncompetes are not enforceable if they aren't done right. And doing them right is harder than it sounds. Navigating the maze of conflicting rules from state to state is delicate, to say the least. It may be a short agreement, but few legal issues are potentially trickier than drafting a noncompete agreement that will both accomplish a company's objectives and "work" in the states where it needs to.
Specifying that agreements will be interpreted under Ohio law and/or litigated only in Ohio courts does not solve the enforceability problem. Courts in less hospitable states often have few qualms about disregarding such contractual choices and following their own state's standards. A crafty former employee-or the new employer-may run into court on their home turf and put a company that has not planned for such a scenario at an unexpected disadvantage.
Except for businesses that are not subject to competition beyond state lines, noncompetes need to be drafted with an eye toward other states' laws. An agreement printed off the Internet will probably not provide ample protection unless the sole purpose is to deter less savvy outgoing employees. That hollow deterrent will work sometimes, but only until employees figure out that is all your company is doing.
Courts are less likely to enforce a noncompete if a company has made a practice of letting former employees violate them with impunity. So once a business has started down the path of the hollow deterrent, changing directions will not be easy.
Noncompetes are not a substitute for hard IP tools. Courts are more likely to enforce the agreements if they are part of an overall program to protect intellectual property. However, there are few weapons as powerful as keeping your key employees from going to work for your competitors while your IP is freshest in their minds.
Bill Nolan is the managing partner of the Columbus office of Barnes & Thornburg. He can be reached at (614) 628-1401 or firstname.lastname@example.org.
Reprinted from the January 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.