Your New Hire’s Non-Compete Agreement

For years you’ve admired your top competitor’s ability to design and market new products and services that have, much to your frustration, consistently outsold yours. Now one of the key members of your competitor’s marketing team is sitting in your office asking YOU for a job. As he describes to you how he thinks he can position your products and services 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 in his desk at the headquarters of his current employer is a signed non-disclosure/non-competition agreement (NDA/NCA).

While your initial inclination toward this likely fact may be that 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 NDA/NCA when faced with a lawsuit may be difficult at best. Further, whether or not your conduct in hiring the new employee was without knowingly violating his agreement, he is still very much subject to the agreement and may face sanctions, 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.

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 an NDA/NCA 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’. But even the most honest and forthright applicant is likely to forget key terms. Again, get the actual agreement and have it reviewed by counsel prior to going forward.

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

  • 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 confidential information, and otherwise adhere to the restrictive covenants in his or her agreement. These types of written statements and admonitions may prove helpful in avoiding certain more serious legal claims, and may keep the prior employer calm enough not to sue 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 NDA/NCA. 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 products or services of the prior employer. Once you’ve determined the appropriate limitations, document them and have the employee sign off as a way 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 NDA/NCA. 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 confidential information protected under the NDA/NCA. 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 NDA/NCA 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 disclosure as well as the initiation of clean room procedures to make sure the tainted information is isolated and does not become part of your company’s products and processes.

Employees from other companies in your industry can bring fresh perspectives, valuable skills and otherwise be great additions to your company. Before proceeding, get the facts about any NDA/NCA that he or she may be under, review it with legal counsel, and proceed with caution.

For assistance with issues similar to those covered by this article, or with other employment law issues, please feel free to contact The Lawson Firm.♦

Attorney Contact:

Scott Lawson, Managing Attorney E:   P: (440) 666-9735

Related Information:

Are Your Trade Secrets Safe?

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

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