- M. Lee Smith Publishers

<p><i>Adapted from<a target="new" href="http://www.hrhero.com/azemp.shtml">Arizona Employment Law Letter</a>, written by attorneys at the law firm Lewis and Roca LLP.</i></p>

<p>#1006 Noncompetition and nonsolicitation agreements can prevent your employees from competing against you after they stop working for you by either barring them from taking a job with a competitor or prohibiting them from soliciting your customers. Here are some basic how-to tips if you''re considering using a noncompete agreement.</p>

<p>Note that state laws vary greatly in this area. Be sure to check your state''s laws to ensure that your noncompetition agreements are tailored to meet local requirements.</p>

<p><b>What''s a Noncompete Agreement?</b></p>

<p>You should consider having a noncompete agreement with any employee who could significantly disadvantage you in the marketplace if she went to work for a competitor. For example, an employee may have inside knowledge of your business operations, close customer relationships (think about that binder of customer names and their unique needs and preferences), or a special skill you helped her acquire over time through training. A reasonable noncompete agreement can prohibit her from taking her special knowledge, customer contacts, or skills to a competing business and giving it an unfair advantage.</p>

<p>But be warned that courts will enforce noncompete agreements only to the extent that they''re reasonable and protect your company''s legitimate business interests and goodwill. Consequently, you may be entitled to keep an employee from competing for some period of time, but the general rule is that prohibition lasts only for the length of time it takes to create an even playing field with a competitor.</p>

<p>For example, that period may be the length of time it takes to train a replacement and allow him to get to the same level of contact and comfort with your customers that his predecessor had. Courts will also consider whether an agreement unfairly limits your former employee''s ability to earn a living.</p>

<p>Nonsolicitation agreements usually prohibit an employee from soliciting your customers or other workers after leaving your company. The same reasonableness requirements apply to those agreements.</p>

<p><b>Can''t I just use a form?</b></p>

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<p>Broad boilerplate language applied to every person in your company in an attempt to cover all your bases and be fully protected isn''t the best way to draft your agreements. Each situation must be carefully evaluated to maximize the agreement''s enforceability without going too far and risking its being held unenforceable. Different considerations also apply to different kinds of information and different types and levels of employees.</p>

<p>You should work with legal counsel to ensure that your agreements are drafted within proper legal parameters and are presented to your employees in a way that will make them legally enforceable. For example, an agreement may be unenforceable if you haven''t given an employee something sufficiently valuable in exchange for it. That requirement can make it more complicated to draft an enforceable agreement with an employee who already works for you - as opposed to a new hire.</p>

<p><b>Which issues must I consider?</b></p>

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<p>Generally speaking, there are three types of provisions you can look for:</p>

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<ol start="1">
<li>Agreements not to compete with your business,</li>

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</li>

<li>Agreements not to solicit your customers and employees, and</li>

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</li>

<li>Agreements not to use or disclose your trade secrets and confidential information.</li>

<li style=" list-style-image: none; list-style-type: none;">
<p> </p>

<p> </p>

<p> </p>
</li>
</ol>

<p>Keep in mind that not all agreements are appropriate for all circumstances. Your receptionist probably doesn''t need to sign an agreement identical to the one signed by your director of research and development. Different strokes for different folks apply here. It''s probably inappropriate to require your receptionist to sign a noncompete agreement, but it''s perfectly OK ask her to sign a confidentiality agreement.</p>

<p>Noncompetition agreements should be used only for employees who could truly hurt your company if they began to work for --or become -- the competition. If you require a group of employees to sign a noncompete, consider whether the agreement''s terms should vary based on each worker''s position with your company.</p>

<p>The key is that the restrictions must be reasonably tailored to protect your legitimate business interests. Therefore, the restrictions you place on a sales agent almost certainly will be different from those on a director of research and development.</p>

<p>Your sales agent is likely to have competitive financial information and proprietary customer information. Consequently, the specific customers assigned to him should be identified in an attachment to the agreement. It''s generally appropriate to restrict your agent for a reasonable time from contacting the customers he was responsible for while in your company''s employ to protect that customer relationship. But it wouldn''t be appropriate to restrict him from contacting customers with whom he had no contact.</p>

<p><b>Time Testrictions</b></p>

<p>The duration of the restrictions you can place on an employee will vary with the nature of her position and duties and the market. As a general rule, the length of a reasonable restriction also will vary with the unique nature of your business. A common, highly competitive type of business will warrant a shorter duration of protection than one that provides unique goods or services.</p>

<p>You also need to consider objectively the interest you''re trying to protect with each employee. If it''s a customer relationship, the appropriate duration for your agreement is most likely the amount of time necessary to train a replacement, plus the time required for him to solidify his relationships with your customers. If the interest relates to the research and development of new and existing products, the duration will be determined by how much time went into developing a product, its competitive life in the market, and the availability of other workers with the skills necessary to take over the job.</p>

<p>Whatever the length of the restriction, you should document the bases on which you determined the noncompete''s duration and discuss them with your employee at the outset of her employment or when you enter into the agreement. If you''ve had a specific discussion and agreed with your employee that a particular restriction is reasonable, the prospects for the agreement''s enforceability will be much stronger. Too often, companies pull a number out of the air without any in-depth consideration of how long the restriction really should be. That won''t help you when you find yourself in court.</p>

<p><b>Geographic Restrictions</b></p>

<p>Your noncompete must also be reasonable in geographic scope. Reasonableness depends on the nature of the employee''s position. A restriction prohibiting a sales agent who worked exclusively in Reno from competing anywhere in the United States will probably be unenforceable unless the prohibited competition is defined to include only specific businesses or competitors.</p>

<p>On the other hand, a research scientist developing products for a worldwide market may reasonably be restricted from developing competing products anywhere in the world, if the facts are particularly compelling.</p>

<p><b>Will your agreement stand up in court?</b></p>

<p>You must draft restrictive agreements in a way that ensures the courts will either enforce them as written or revise them to be enforceable. In some states, courts have been willing to "rewrite" an overly broad portion of an agreement to make it reasonable and thus enforceable. In other states, it all or nothing - courts will either uphold the whole agreement or strike it down.</p>

<p>Just because you have a great noncompetition or nonsolicitation agreement doesn''t mean you can always count on a court enforcing it. Enforcement can vary from judge to judge. We don''t have to tell you that litigation can be expensive and uncertain. Much of the value of these agreements lies in their ability to deter employees from engaging in the prohibited behavior in the first place. A noncompete or nonsolicitation agreement can be a powerful tool, but you must use it wisely.</p>

<p>Copyright 2004 M. Lee Smith Publishers LLC. This article is an excerpt from <a target="new" href="http://www.hrhero.com/azemp.shtml">Arizona Employment Law Letter</a>. Arizona Employment Law Letter should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only. Anyone needing specific legal advice should consult an attorney.</p>

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