Have you ever considered what effect the loss of a key employee to a competitor might have on your business? If you don’t think it will happen to you, think again. It will.
Gone are the days when an employee hires in with a company and remains to earn a gold watch. In today’s marketplace, movement from one company to another is inevitable. Sooner or later, a key employee will announce on a Friday afternoon that he or she will be leaving and starting with your competitor Monday morning. What has you done to limit the impact this will have on business?
If you’re smart, your company requires key employees to enter noncompetition agreements. These are invaluable and will protect your company and its confidential and proprietary business information. However, to pass legal muster, such agreements must be properly designed. Careful drafting, proper consideration and inclusion of relevant clauses is of critical importance in the event a court is called upon to enforce an agreement.
Careful drafting means the agreement is drawn to protect your company’s legitimate business interests. Legitimate business interests that can be protected include your company’s relationships with its clients. An employer has a legitimate business interest in limiting the ability of an employee to take advantage of personal relationships developed while representing the employer to the employer’s established clients.
Another legitimate business interest is protecting trade secrets from being divulged by the employee to a competitor. Lastly, your company has a legitimate business interest in restricting competition from the employee based on skill, experience or talent developed during the period of employment.
In Ohio, an agreement restraining an employee from competing with a former employer is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee and is not injurious to the public.
Factors to be considered in determining ”reasonableness” include:
- The absence or presence of limitations as to time and space;
- Whether the employee represents the sole contact with a customer;
- Whether the employee is in possession of confidential information or trade secrets;
- Whether the agreement seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition;
- Whether the benefit to the employer is disproportional to the detriment to employee;
- Whether the agreement operates as a bar to the employee’s sole means of support; and
- Whether the employee’s talent which the employer seeks to suppress was actually developed during the period of employment.
A noncompetition agreement, like any other contract, must be supported by proper consideration. In Ohio, proper consideration is present when the agreement is entered into by the employee at the time he or she accepts employment.
In this situation, a valid exchange of promises occurs: The employee promises not to compete upon termination of employment and the employer promises to hire the employee. Keep in mind, when the agreement was not agreed to by the employee upon initial hire, it must be supported by something more than a promise of continued employment, i.e., an increase in salary or other job-related privileges.
A noncompetition agreement should include other relevant clauses, including one relating to the protection of trade secrets and other confidential and proprietary business information. In Ohio, contractual provisions that restrain employees from misappropriating such information for their own gain are enforceable.
It should contain a clause specifically allowing your company the right to seek an injunction should the employee breach the agreement. It should also provide for the immediate return of all company property in the employee’s possession. These are but some of the relevant clauses to consider.
While the loss of a key employee is always disruptive, the disruption will be minimized if proactive steps have been taken to reasonably restrict unlawful competition by the departing employee. Protection of your business interests and client relationships, as well as prevention of disclosure of trade secrets and confidential and proprietary business information, are valuable nontangibles worth protecting from the inception of the employment relationship with a noncompetition agreement.
Remember, the only thing worse than not having a noncompetition agreement to point to in the event a key employee tells you he or she is joining a competitor is having a noncompetition agreement that is unenforceable.
Dan Urban is an attorney at Arter & Hadden LLP and a member of the firm’s Business Litigation Group, the E-Group and the Growth Group. The E-Group and Growth Group are multidisciplinary groups of attorneys who focus their practice on entrepreneurs, Internet, e-commerce and emerging growth companies. He can be reached at (216) 696-4193. For additional information about the E-Group and to read SBN ”Matter of Law” reprints, visit the Arter & Hadden E-Group.