Non-Compete Agreements: Are the Benefits Worth the Risk for Your Business?

woman signing an employee non compete agreementMany companies utilize non-compete agreements as they may offer critical short-term protection of information and assets. There are many reasons to consider using a non-compete agreement.  In most states, including GA, employers may require certain employees to sign non-compete agreements to prevent employees from taking proprietary information and valuable training to a different company for material gain.

Non-compete agreements can also be used when signing a commercial real estate lease.  As an example, a business that sells pet supplies may ask the landlord to put a non-compete clause in the lease agreeing not to put another pet store in the same shopping center. This would protect the owner of the pet store from direct competition, which can help increase profitability for the tenant and secure payment of rent to the landlord.

A well-crafted non-compete agreement works to protect a business from information or expertise being poached by the competition.

The Benefits of Non-compete Agreements

  • Short term protection of training investments and proprietary information
  • Less likelihood of losing important client lists to competitors
  • Less likelihood of losing employees that you have trained to a competitor
  • Less likelihood of employees that do leave taking other employees and customers with them (due to restrictions on competing behavior)

What Non-competes Should Define

In order to be enforceable, non-compete agreements need to be both clearly defined and considered reasonable in light of the particular employers legitimate need for protection.

  • Who is a competitor? Typically a competitor is a similar company in a similar industry, operating in a specific geographic area. A competitor can also include an employee who leaves and creates his/her own company.
  • The length of time. This is the timeframe your non-compete will be enforceable. Typically this can go from 1 year to multiple years depending on the role of the employee. Defining too long of a timespan can make enforceability questionable.
  • The geographic area. Will your non-compete cover the nation, key states or specific cities? This is another key consideration, as covering an unreasonably large area can significantly restrict the employee’s ability to seek employment.
  • Compensation. The non-compete benefits the company. Exchanging something of value for the employees agreement to sign the non-compete is an important component in its enforceability. Financial incentives are often used here; however, in some cases, continued employment could be a valuable exchange.

Choose Carefully

It’s important to be selective when considering which employees should sign non-compete agreements and what should be in the specific agreements. If an employer makes every employee sign the same agreement, it may be less likely to be upheld in court. Agreements may be stronger when they are used for employees with access to sensitive & proprietary information that can harm your business in the hands of a competitor.

Will Your Non-Compete Hold Up In Court?

To better protect your business and improve the likelihood that the agreement will be enforceable, careful consideration should be given to the duration, geographic area and scope of the agreement.  It is advisable to have an attorney, with experience related to non-compete restrictive covenants and knowledge of your business, help set reasonable criteria.

Timing is also a consideration. If the employee signed the non-compete prior to employment as part of the hiring package, success of enforcing the agreement is much more likely as employment is part of the consideration given for signing. If the employee signed after being hired, the court will consider if the employee received appropriate consideration in return for signing the agreement.  In that case, additional consideration may be required in the form of money, training or services, to insure that the non-compete is valid.

Enforcing a Non-Compete: Benefit vs Risk

Due to specific requirements in different industries and different states, non-compete agreements also have the potential to backfire.  In 2011, the GA legislature passed HB 30 the Georgia Restrictive Covenants Act, which put better protections in place for both parties to a non-compete agreement by specifying requirements of such an agreement.’  While what constitutes a strong agreement has been clarified, there are still areas subject to interpretation that create risks when it comes to enforcement.

If an employee that leaves a company has signed a non-compete agreement and chooses to ignore it, what should that company do?  When put into a position to take an employee to court, it’s critical to consider the risk of doing so. If a company sues an employee and loses, all of their other similarly worded non-compete agreements become at risk of being unenforceable.

An attorney can be invaluable to review the non-compete agreement and consult with management on the risk and potential implications to the business if that and other non-competes were to be considered invalid. It is also advisable for employees asked to sign a non-compete agreement to have an attorney review this or any other contract before signing.  If you need an attorney to draft or review your non-compete agreement, please contact the offices of Hecht Walker P.C. at 678-331-7274.

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