Your New Hire’s Non-Compete

For years you’ve admired your top competitor’s ability to create new products that have, much to your frustration, consistently outsold yours. Now one of the key members of your competitor’s product team is sitting in your office asking YOU for a job. As he describes to you how he thinks he can position your company for double-digit sales growth, you cannot help but think to yourself, “is this too good to be true?”.  Don’t let your excitement, however, blind you to one likely fact; buried somewhere at the headquarters of his current employer is a signed non-competition agreement (non-compete).

While your initial inclination toward this likely fact may be to believe what you don’t know can’t hurt you, this is one case where getting all of the facts out on the table is the best way to go. Proving your ignorance of the non-compete when faced with a lawsuit may be difficult at best. Further, whether or not you have actual knowledge of the non-compete or its terms, your prospective new hire is still very much subject to the agreement and may face legal action, including an injunction, if hired by you. As a result, you may lose your new star, and what you’ve invested in him, permanently or at least until the matter is sorted out.

Get the Facts, Then Protect Your Company

Before you hire anyone, and especially in cases where a person seeking employment with you comes from a direct competitor, make it a practice to determine if the person is bound by a non-compete or other restrictive agreements with his or her current employer. If they are, get a copy of the agreement and have legal counsel review it. Don’t just go by what the applicant tells you is in his or her agreement. Since he or she wants a job with you, the applicant is likely to minimize what is in the agreement and characterize it as ‘no big deal’.  Even the most honest and forthright applicant, however, is likely to forget key terms. Again, get the actual agreement and have it reviewed by counsel prior to going forward.

Find out from counsel whether the agreement is enforceable and just what it covers. You can then formulate a strategy for dealing with it. If your counsel determines that the new hire’s non-compete is at least somewhat enforceable and applicable to the hire’s new job, here are some steps you may wish to take to avoid or insulate your company from liability:

  • As a first step, ask counsel to revise the offer letter as necessary to advise the application to give ample notice at the prior employer, cooperate in the transition, avoid encouraging other employees or customers to leave with him or her, avoid taking or copying proprietary information, and otherwise adhere to the restrictive covenants in his or her agreement. These types of written statements and admonitions may prove helpful in side-stepping certain more serious legal claims, and may appease the prior employer just enough to sway them from bringing you into a suit in the first place.
  • Structure the terms and conditions of the new hire’s employment to avoid putting him or her in a position to violate the non-compete. For example, you may wish to structure his or her job in ways that make it less likely that he or she will be tempted to rely upon information or contacts from his or her prior job. You may also wish to forbid the employee from having any contact or involvement at all with customers of their former employer. Further, any devices he or she used while employed with the former employer (i.e. phones, laptops, tablets, etc.) should be examined to make sure they do not contain proprietary information or data of the former employer.  Finally, you may wish to avoid extending to him or her any pay incentives that would encourage violations, such as incentives for encouraging customers to switch from using the products of the prior employer. Once you’ve determined the appropriate limitations, document them and have the employee sign off on them as a means of insulating your company should legal action against the employee nevertheless occur.
  • Refuse any requests from the employee for a blanket indemnification agreement against violations of his or her non-compete. Such an agreement opens you and your company up to a lawsuit for tortious interference, which can carry punitive damages. And, it should go without saying, don’t offer to indemnify him or her either. In highly competitive/highly litigious industries, even the offer of such an indemnification agreement can be viewed as hostile and trigger legal action.
  • Direct communications from persons with the former employer to a person other than the new hire to avoid claims of solicitation. Ensure that the new hire’s communications to clients or customers of your company avoid disparaging the prior employer and don’t use any proprietary information protected under the non-compete. Also make sure that you document any unsolicited calls from customers of the prior employer to the new hire as proof that the calls did not violate the new hire’s agreement.

If, despite your company’s best efforts, it is discovered that the new hire has breached his or her former employer’s non-compete while in his or her new position with your company, swift action is necessary to insulate your company from liability.  Administrative leave for the new hire may be appropriate to avoid further breaches. Further, you may wish to initiate “clean room” procedures to make sure any information misappropriated from the prior employer is isolated and does not become part of your company’s products and processes.

To Sum it Up…

Employees from other companies in your industry can bring fresh perspectives, valuable skills, and otherwise be great additions to your company. Before proceeding, however, get the facts about any non-compete or other restrictive agreement between the employee and his prior company. Have legal counsel review the agreement and formulate strategies for protecting your company from liability.

For assistance, please feel free to contact The Lawson Firm.  We have years of experienced in providing counsel to companies concerning non-compete and other restrictive-covenant agreements.  We help companies identify potential liabilities and formulate strategies for managing them.♦

Contact The Lawson Firm

Related Information:

Are Your Trade Secrets Safe?

Is it Time to Update Your Company’s Non-Disclosure/Non-Compete Agreement?

Intellectual Property Protection

logoAttorney Advertising. The Lawson Firm, LLC (“TLF”) is a law firm providing legal counsel and value-added legal services to its business clients.  This article is intended to provide general information only and is not intended to provide solutions to specific issues. Readers are cautioned not to attempt to solve specific issues solely on the basis of the information contained in the article. TLF does not claim expertise in the laws of jurisdictions other than those in which our attorneys are licensed. Certification in any of the practice areas mentioned in this article, other than labor and employment law, is not available in Ohio.

© Copyright 2014-17. The Lawson Firm, LLC.

Is it Time to Update Your Company’s Non-Disclosure/Non-Compete Agreement?

Employee non-disclosure and non-competition agreements (NDA/non-competes) are important safeguards against the misappropriation of a company’s trade secrets and other confidential business information.  Such agreements can play a critical role in a company’s intellectual property protection program.  Too often though, a company will use the same form agreement for years even though its legal value may have eroded due to changes in the law or changes in the company’s business. The following are some things to consider in determining whether it may be time to update your company’s NDA/non-compete.

Has Your Company Grown?

Smaller companies that begin as close-knit, highly invested groups often first consider using an employee form NDA/non-compete when the first “outside” employees are hired. Often this first round of hires is mainly administrative, has limited (if any) access to critical company trade secrets, and therefore does not pose the type of threat from which an NDA/non-compete is designed to protect the company. It is not uncommon for these companies to use a fairly non-restrictive, general standard-form agreement at first and to continue to use the same form even after the company begins hiring additional, more specialized employees with greater access to (and knowledge of) the company’s trade secrets. It is only after one of these newer, higher-level employees defects with critical business information in hand that the company comes to realize its NDA/non-compete should have been more comprehensive and more restrictive.

Has Your Company’s Business Changed?

Similarly, it is not uncommon for a company’s development of new products, business methods, or marketing channels to outpace the protection afforded by its NDA/non-compete. The owner of a small software products company recently learned the hard way that his company’s NDA/non-compete would pose little obstacle to a key employee who had defected to a competitor. The form agreement did very clearly and specifically prevent the employee from engaging in “…the business of providing security software to accounting firms.”  The problem? The company was no longer in the business of providing security software to accounting firms. In fact, the company had, for the last several years, only developed commercial websites for online retailers. The employee, therefore, was not restricted by the terms of the company’s NDA/non-compete from joining another commercial retail website development firm.

Does Your Company Have More to Protect Now than it did in the Past?

Beyond the more obvious misalignment between a company’s business and the protection afforded by its NDA/non-compete described above is the more gradual misalignment that occurs as a company slowly, but surely, develops more critical trade secrets to protect. A company that starts as a reseller, or that engages heavily in shadowing the moves of its competitors at the start, may need to eventually give greater consideration to the value of the technologies and business methods it develops as the company grows and evolves. It is not uncommon for the protections afforded by a company’s NDA/non-compete to seriously lag behind the company’s need to protect the valuable trade secrets and other critical business data it gains over time.

Has Your Company Added Employees or Contractors in Other Jurisdictions?

Companies that expand to multiple states often mistakenly continue to use the same NDA/non-compete with employees in all of the states in which it does business.  The NDA/non-compete typically originated in the company’s home state and the company simply continued using the same form agreement as it expanded to new states.  The enforceability of these agreements, however, varies from state to state. Some businesses find out too late that an NDA/non-compete that was enforceable in its home state might not hold up in one or more of the other states to which it has expanded over time.

Has Your Company Updated its Agreement Since the Enactment of the Federal Defend Trade Secrets Act?

The federal Defend Trade Secrets Act, enacted in May 2016, contains provisions providing advantages for companies that include certain notice provisions in their employee confidentiality agreements.  Such advantages include the right to sue for punitive damages and attorney’s fees in actions brought under the Act.  If your company has not taken advantage of these new protections, it may wish to consider doing so.

Is it Time to Update Your Company’s Agreement?

To discuss how we may assist you with creating or updating your company’s non-disclosure/non-competition agreement, or with other aspects of your company’s intellectual property protection program, please contact us.♦

Contact the Lawson Firm

Further Information:

Are Your Trade Secrets Safe?

Attorney Advertising. The Lawson Firm, LLC (“TLF”) is a law firm providing legal counsel and value-added legal services to its business clients. Further information about TLF may be found at www.lawsonfirm.net. This article is intended to provide general information only and is not intended to provide solutions to specific issues. Readers are cautioned not to attempt to solve specific issues solely on the basis of the information contained in this article. TLF does not claim expertise in the laws of jurisdictions other than those in which our attorneys are licensed. Certification in any of the practice areas mentioned in this article, other than labor and employment law, is not available in Ohio.

© Copyright 2012-17. The Lawson Firm, LLC.