Thursday, April 15, 2010

The Key to Protection Is Good Drafting

Having drafted and reviewed non-compete agreements for 13 years, I have seen plenty of good and even more bad. It continues to surprise me how sophisticated companies make boneheaded drafting mistakes.

Drafting non-competes is not that difficult, but it does require attention to detail and consideration of individual circumstances. And it requires you not to buy something off Legal Zoom.

Here are some general, key principles for employers to remember. (Note to employees: Pay attention. This will help you determine whether your agreement might suffer from a fatal flaw or loophole).

1. Remember that each employee is different. Companies (and their attorneys) are often tied to forms. There is nothing wrong with having a template, but don't sacrifice enforceability for the sake of expediency. A non-compete for someone involved in sales should look different than one who is in product development. Also, depending on the applicable jurisdiction, a current employee asked to sign a non-compete for the first time may have to be given tangible consideration, like a bonus, for signing. Finally, if your employee works on-site at a client and you don't want the client stealing him or her, does your covenant strictly prohibit the employee from accepting a position with that client, or (more likely) does it just prohibit solicitation for competitive purposes?

2. Consider less restrictive alternatives. Not every employee needs to have a business non-compete. Particularly for salespersons, a well-drafted client non-solicitation provision may protect the employer more than adequately.

3. Define key terms. Nothing is more annoying than reading a contract where every fifth word is defined. But as I've written in the past, the dictionary is not necessarily your friend. For certain key terms - like "prospective customer" or "competitor" or "solicit" - consider defining the term so there is no quibble after the fact about what the employee's obligation really is.

4. Address proprietary rights. Standard employee confidentiality clauses don't pose much of a problem, but consider other protections too - such as an invention assignment clause (particularly for those employees charged with creating proprietary products, such as source code developers), a clause dealing with return of company information on termination, and (for those followers of the Computer Fraud and Abuse Act) a clause putting an employee on notice that s/he does not have authorization to use the company's computer system for any reason relating to post-departure competitive plans.

5. Choose Law and Venue. Depending on what jurisdictions have an interest in a dispute, a clear choice of law clause can reduce a preliminary (and expensive) fight over conflicts of laws. If you conduct business in multiple states, consider what forum has the most favorable non-compete law and whether each contract can fix this law as the default.

6. Don't forget remedies. Liquidated damages clauses are fraught with drafting peril. They are not right for every occasion, but they may work well for non-solicitation or no-hire provisions. Finally, employers ought to consider adding an equitable tolling, or extension, provision that empowers a court to toll the period of time in which an employee has been in breach of the agreement so the employer, if it prevails, can obtain the full benefit of the contract.

These are by no means all the considerations employers must think about, but be wary of using one standard document for all employees. This usually leads to problems when someone jumps ship.

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