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"Non-Compete" Clauses in Contracts

Some information on what is and isn't legal in a non-compete agreement with an employee. April 5, 2006

Question
I'm considering hiring a former company president that has recently been forced out of business due to client default. We are looking at him for a sales position, as he secured most of the projects for his former business. I'd like advice as far as a non-compete contract. We did 3.5m last year, and his company did approximately double. Potential success is unlimited, and we don't want to lose our client base if things go south.

Forum Responses
(Business and Management Forum)
From contributor J:
In what state do you conduct business? In a some states, they're not legal. In most states, they're limited in scope. You should contact a labor attorney or at least contact your state labor agency. I would be skeptical of any other advice that you receive here.



From contributor W:
To be binding, a non-compete agreement must have several elements. And to insure that you have those worded correctly in your state, you need the help of an attorney.

First, it cannot eliminate the ability of the employee to earn a living in your industry. So that means that it needs to have a limitation in scope that restricts him from selling services in direct competition with you in your particular locale. Widest you can typically make binding is only within your state. If you're not selling statewide, then make the limitation map onto the region in which you sell.

Second, you cannot limit his ability to sell non-competing products or services to his customers or to yours. So you'll need to define the scope of your service offering very clearly. You cannot prevent him from selling all products/services made from wood, for example.

Third, what is more important is non-disclosure. That means that you'll need language restricting him from using elsewhere the information he gains from you, particularly about your customers, your pricing models, your costing, your other employees, etc. In most states, that can be made more binding than a non-compete.

Fourth, the agreement must be limited in time. Reasonable is 2 - 3 years. Minimum is 12 months, and the longest of which I'm aware is 5 years.

Fifth, the agreement must describe the benefit he receives from signing it. Your attorney can give you the right language to address that issue as well.

I've had to manage this issue with salespeople for 20 years, and those are the elements I've learned are key to creating an agreement that is fair to both parties, clear, and likely to be enforceable.



From contributor G:
They are only enforceable in many states if the employee received compensation for entering into the agreement. I had one in my last position and it was tied to stock with a significant value. The company paid me the money and I did not compete directly with them. I had a good attorney, even as the employee, to make sure of the legalities.
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