Participating in an increasingly globalized and competitive marketplace underscores the importance of companies’ having effective restrictive covenants. While there are several types of restrictive covenants, this blog will focus on employee (including executive) non-compete agreements. Due to their more onerous nature, non-competes traditionally introduce a number of challenges, both for the company seeking one and the employee who is subject to it.
While this blog predominantly addresses employee non-competes, many of the areas it addresses are also appropriate to consider for other types of relationships, including consultants and contractors. Accordingly, there are several considerations you should keep in mind while negotiating an enforceable non-compete.
1. The agreement must identify a legitimate business interest. At the heart of any legally enforceable non-compete agreement is a well-articulated, legitimate business interest. If the company has no legitimate business interest to protect, then regardless of the reasonableness of its other terms, the non-compete is unlikely to be found unenforceable. A legitimate business interest should bear some relation to what the employee will be doing for the company and what sensitive information and relationships the company will disclose to the employee in consequence. Some examples of legitimate business interests include protecting trade secrets, safeguarding current or prospective customers, preserving customer goodwill and goodwill of the business, and maintaining the confidentiality of business information, like contract terms, methods, SOPs, and training programs and materials on which the business may have spent a good deal of time and money.
2. Unreasonable geographic areas and periods of time frequently undermine non-compete obligations. Non-compete agreements often stumble on setting a reasonable geographic area and reasonable duration before expiring. As a general rule, the bigger the territory and the longer the duration applicable to a non-compete, the harder it will be to enforce. In order to be enforceable, the territory for a non-compete should be no larger than—and its duration no longer than—what is reasonably necessary to protect the company’s legitimate business interests. Territory and time are fact-intensive inquiries based on a proper understanding of the company’s business and what it needs to protect. Documenting the justifications supporting a non-compete, preferably in the agreement itself, can therefore be critical.
3. Both state laws and common law principles shape the contours of non-compete agreements. Most U.S. states, including Georgia, statutorily recognize non-compete agreements in protecting legitimate business interests. Other states rely partially or solely on common law principles. Some states even prohibit non-compete agreements except in limited circumstances. Accordingly, the rules governing the enforceability of non-competes can vary greatly between jurisdictions. In Georgia, for example, a non-compete of two years or less is presumptively reasonable. That is, however, not true of every state. And there may be circumstances that may justify a longer or shorter duration, depending on the business need and applicable law.
4. Non-compete agreements should be tailored to specific industries and the nature of the relationship. Non-competition agreements should be tailored to fit what the company needs while not being overbroad in duration or territory or otherwise substantially depriving an employee of the ability to earn a living post-termination. Different employee classes also merit different types of non-competes. For example, the type of non-compete appropriate for an employee in sales would likely be different from a non-compete for an employee in product development. And some employee classes may not qualify for a non-compete at all. What needs protecting from whom, and for how long, thus remain central questions, whether drafted for just one employee or for a whole class of employees within a company.
5. Think about adding non-solicitation and confidentiality obligations. Non-competes should be considered alongside other safeguards available to a company. For example, a well-drafted non-solicit agreement may do a better job of protecting core customer relationships or in stopping a departing employee from enticing other key employees to join a competing or other company. Confidential information and trade secrets generally enjoy superior protection through a confidentiality and non-disclosure agreement which, unlike a non-compete, can last for years and afford broader enforceability and scope. Ultimately, having multiple protections is going to work to a company’s benefit, especially if the non-compete runs into trouble.
There are numerous considerations we did not cover in this blog. Do-it-yourself non-compete agreements are often riddled with deficiencies which may not be obvious until it comes time to enforce the non-compete against a wayward employee. Depending on their severity, these deficiencies may even be lethal to the non-compete. The best way to ensure your company’s non-competes are reasonable is to retain the services of an experienced business attorney.
Baker Jenner has made its reputation on protecting a wide range of interests for businesses in and around the Atlanta area. We’d be honored to discuss your business goals with you and how we can help you achieve them. Let’s talk today.
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