Friday, April 15, 2011

What Provisions Does the Employer Need In Its Non-Compete Agreeement?

A common theme in non-compete disputes is poor drafting. This is why I always tell my employer clients that putting a binding, enforceable non-compete agreement in place requires more than just pushing the print button on a prior form.

In reality it takes a minimum of four hours to consult with a client, put a form contract together, and then follow-up to make edits and finalize it for actual use. Even this is an austere budget, but it may be doable in some cases.

I normally advise employers not to throw in the kitchen sink. But here are the key terms I generally will include in most non-compete agreements, aside from (obviously) the covenants themselves which are always different and always specifically tailored to the employee.

1. Tolling - This clause ensures the covenant terms runs from the date of breach, not the date employment ends. Not all states imply a tolling right. It may be essential for the contract to spell it out.

2. Liquidated Damages - This may not be for every situation, but ordinary lost profits are tough to prove in competition cases. A liquidated (or pre-determined) damages clause sets the formula (e.g., two times annualized commissions per solicited client) and leads to a more ready assessment of what the case may be worth on the financial side. I had a client in last week who asked whether liquidated damages are "cheaper" to prove, and the answer generally is yes.

3. Invention Assignment - This provision is most appropriate for creative employees and those who develop products, ideas, source code, and the like. Some states, like Illinois, have carve-outs that may need to be included in the contract.

4. Attorneys' Fees - Everyone is familiar with the idea, and it is generally a good idea to make sure a fee-shifting clause is mutual. Otherwise, it may not be enforced.

5. Definitions - This depends on the agreement, of course. A definitions section serves a few purposes. It usually means you have a more readable agreement, but also it clarifies the nature of the restrictions and allows an employer to address business-specific matters that may arise. An employer should consider definitions for key terms like the following:

Restricted Territory
Restricted Customer
Business of the Company

6. The Playing Field - Venue, choice of law, arbitration, and jury trial waiver. The first two are essential for employers operating in several states.

Keep in mind this list is not exhaustive, and it certainly does not cover the prototype executive employment agreement, which itself will contain detailed terms on compensation, benefits, severance, and termination.

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