Employment Law II: Noncompete and nondisclosure – keeping things in the family
Noncompete and nondisclosure agreements have become common pieces of employer/employee and contractor relationships, as well as in relationships with suppliers and parties in a range of contracts. Many enterprises benefit from having, and using, these agreements, which can of er protection against unauthorized use of important assets, such as intellectual property, customer lists, business models, strategy, and broader industry relationships. These concerns, which are valid and important to keep in mind, drive the regular use of such agreements. It makes sense to have an understanding of what these agreements are and how they work as part of any plan to incorporate them into your relationships.
As an initial matter, an enterprise should use noncompete and nondisclosure agreements in situations where it needs to protect intellectual property, confidential information, and trade secrets from competitors and former employees. (Trade secrets and trade secret policies will be covered in a separate blog, and form part of an enterprises’ overall IP strategy.) While both agreements share some common elements and purposes, they do in fact operate differently and of different types of protection.
- Used to protect employers’ customer relationships, special processes, trade secrets, and confidential information.
- Prevent employees/contractors from working for a competing business after leaving current employer.
- Agreements are enforced for a predetermined period of time.
- Apply in a limited geographic space.
- Used to protect business confidential and proprietary information.
- Prevent employees/contractors from sharing business confidential and proprietary information.
- Agreements may have a longer duration and can be enforced for an indefinite period of time.
- Apply in a broader geographic scope.
Noncompete agreements are typically used to prevent employees, and contractors in certain situations, from working for a competing business after leaving their current employer. These agreements can help to protect the employer’s customer relationships, special processes, trade secrets, and confidential information. Noncompete agreements are commonly used in industries in which an intellectual property plays a significant role and is critical to the enterprises’strategy, such as tech, healthcare, and finance industries, although they may be used elsewhere when appropriate. Under a noncompete agreement, the employee is prevented from working in the same sector for a predetermined period of time. This means the employer can train the worker and build their business in the sector without worrying about creating a resource that will benefit a competitor in the process. There are, however, some very specific concerns with noncompete agreements that must be kept in mind.
Because noncompete agreements limit a person’s ability to find employment, public policy and state laws limit them, to make sure they serve a valid purpose. In most states, noncompete agreements must be closely tailored to the employer’s business needs, apply in a limited geographic space, and last for a reasonable duration. For example, a noncompete that prohibits a worker from working anywhere in the world for the foreseeable future would almost certainly be found unenforceable. In contrast, an agreement that lasts one year and applies in the geographic area where the employer operates may be seen as reasonable. Even so, in some states noncompete agreements are not allowed in most instances. One exception to broad state prohibitions against noncompetes include instances where an owner sells a business’ assets or the business as a whole–noncompetes are permitted in such situations to protect the value of the business transferred. Due to the state specific nature of the limitations, it is important to consult qualified counsel for advice.
Nondisclosure agreements, also known as confidentiality agreements, are used to protect a business confidential and proprietary information. These agreements may be used with employees, contractors, and other third parties who may have access to confidential information, such as business plans, pricing strategy, IP, and financial data. In contrast to noncompete agreements, nondisclosure agreements may have a longer duration and broader geographic scope of application. Indeed, it may be possible to have an indefinite period of application. Nondisclosure agreements will carefully define the scope of the information they cover, and in most cases, nondisclosure agreements will include provisions that will allow some information to be disclosed under certain, well-defined circumstances. In addition, these agreements should contain clear enforcement mechanisms that protect the disclosing party if a warranted disclosure occurs. Consequently, it is extremely important that nondisclosure agreements be carefully drafted, taking into account the disclosing parties’ interest and risks.
In many cases, a broad employment agreement will add both noncompete and nondisclosure clauses. Generally, this will save time and make for an easier agreement. The parties should consider what might happen if a court were to find the entire agreement invalid for some reason. If this should happen, these clauses might not offer the protection the employer seeks.
Drafting carefully crafted documents that align with the enterprise’s goals, and values, is important in all contexts, and should be kept in mind here. Agreements that do not comply with state law, or which do not adequately provide the protection that the enterprise requires, may end up being more destructive than one expects.