Non-Compete Agreements: Draw the Law

This is definitely a topic of interest among employers and lawyers alike.  In addition, small business owners should remember I talked about non-competes in the context of buying a business.

What is a Non-Compete Agreement?

Before getting to what a non-compete agreement, you have to realize as our economy has grown and changed over the years, we now are in a knowledge economy.  Therefore, it is imperative for companies to not only protect their traditional intellectual properties, but the knowhow that gives them a competitive edge.   Through laws and agreements, like theHawaii Trade Secrets Act and non-competes, companies have sought to enforce their proprietary rights against others.

A non-compete agreement tries to prohibit or limit the degree in which an employee can compete with their former employer.

The point of a non-compete is to prevent a former employee from running off with all your valuable information and using it to compete against you.

Problems with Non-Competes

I tell this to many clients who come to me for drafting agreements, “I can put whateveryou want in the agreement, but at the end of the day it matters if the court will enforce it.”  So it is the case with  non-competes, many employers want to make it impossible for their former employee to basically work.  This is not going to fly with a court because as a society, we value trade and the ability to make a livelihood for yourself.  Thus, courts will closely scrutinize these agreements because by their inherent nature they restrict trade.

The Law’s Balancing Act

The calculus the court usually enters when trying to decide whether to enforce or strike out the non-compete agreement is as follows:

A vs. B + C, where

(A) is the company’s interests at risk (trade secret, proprietary information, investment in the employee) VS. (B)is the employee’s ability to make a living + (C) is the“public good” (access to goods and services).

The court uses this balancing test to determine the enforceability of a non-compete agreements.

Therefore, a court will ignore a company’s non-compete with an employee if the risk is minimal to the company and enforcement would leave the employee unable to earn a living and harm the public.

The Factors

Specifically, a court looks to the following factors when make determinations on the aforementioned balancing equation:

  1. duration of the restriction (is it for six months or till the end of time?)
  2. geographic restriction (is it a part of a district on an island or is it the whole state?)
  3. the scope of the restriction (is it a specific level of job or is it the whole industry?)
The Three Restriction Factors of Non-Competes: (1) duration; (2) geography; and (3) Scope.

What those Factors Mean When Creating a Non-Compete

Therefore, the tricky part of drafting a non-compete is to make sure you do not draft something so broad it prohibits an employee from working on this planet, in the same industry, for as long as he or she lives.  That is overbroad and a court would definitely not enforce it.

If you make the non-compete too broad you run the risk of a court striking it down, but if you make it too narrow it is useless as the former employee may make use of your information against you.

On the other hand, if you make the non-compete so small in its restriction (i.e. you can’t work in this building, for a day, as a payroll manager, and the person has HR operational skills learned at your company) then there is no point in creating the agreement because your former employee will just take all the knowledge and experience you invested in them and work for your competitor.

Final Words

Thus you are left with creating a non-compete agreement somewhere in between those extremes.  It always is best to have an attorney work with you on this matter.  Let them see how your business works and what is of value, but also how the employee you want to sign the non-compete will operate within the company.  It will help them craft an agreement that zeroes in on protecting the valuable knowledge, but allowing the former employee to make a living without using that stuff against you should they ever leave.

Finally, a brief word on independent contractors (IC) and the use of non-compete provisions, as stated in the other Draw the Law post on ICs, the issue of control comes up.  If you think about it, a non-compete is controlling the behavior of the IC.  Therefore, too much control (restrictions) on the IC may make them an employee in the IRS’s viewpoint.

Consider using a non-disclosure agreement instead to protect sensitive information when dealing with ICs.

[author] [author_image timthumb=’on’]http://www.alohastartups.com/wp-content/uploads/2011/09/RyanKHew.png[/author_image] [author_info]I am a practicing attorney in Honolulu, HI helping small businesses with their transactional and compliance needs.
Contact Me Today: Web| 808.944.8400 @RKHewEsq Ryan K. Hew, Attorney At Law[/author_info] [/author]

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.   No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.   Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.