To noncompete or not?

Imagine this workplace scenario: your company relies on an employee to manage customer relationships. Then that employee leaves to join a competing company and begins to solicit your customers or uses your company’s proprietary information. That’s the “forehead-smacking” moment that many employers face, asking themselves: “Why didn’t we negotiate a noncompete?”

It seems so simple. However, companies must be careful when drafting agreements that include provisions restricting an employee’s ability to work after leaving. When working with employers to draft employment agreements, I emphasize that a noncompetition agreement should be tailored to its particular business-this is not an instance where a general form will suffice. This is especially important given that Colorado law provides that all covenants not to compete are void except in four circumstances:

• Any contract for purchase or sale of a business or the assets of a business;
• Any contract for the protection of trade secrets;
• Any contractual provision providing for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years; and
• Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.

Colorado courts view noncompetition agreements with disfavor. When a company seeks to obtain (or oppose) an injunction or money damages against a former employee for improper use of a customer list or other client data, courts will (1) scrutinize the non-competition agreement in place to determine whether one is justified and (2) conduct a thorough analysis of the scope of the agreement. As a result, an employer should keep the following points in mind when considering a covenant not to compete to protect trade secrets, including customer data:

• The information must actually be a trade secret. Under Colorado’s Uniform Trade Secrets Act a trade secret includes “any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information.” The information must be secret and have value, and the company must have taken measures to keep the information secret.

• Customer lists are not automatically protected. Information that can be easily obtained through public means-like the phone book or internet directories, for example-may be rejected as a trade secret. In cases where employees bring their own potential customers to the company or where customers also obtain products or services through other vendors, the information may not be the company’s trade secret.

• Companies should protect their trade secrets. Measures can include restricting access to the information, taking back all customer lists once the information has been used by the employee for solicitation or contact, and crafting policies restricting employees from sharing the information.

A covenant not to compete must also be reasonable in scope. Courts may strike a noncompetition clause if it is overly broad or doesn’t address time and geographic limits. One option is to limit the restriction to the area in which the employee established customer relationships during his or her employment; another is to limit the restriction to a defined radius of the employer’s current location. A court won’t tolerate an agreement that prohibits all competition. Therefore, keeping the agreement limited to a reasonable time and geographic limitation will only strengthen its enforceability.

Furthermore, there must be independent consideration, such as a pay raise, bonus, or additional benefits, if a covenant not to compete is executed during the course of employment, rather than at the time the employee is hired. A recent Colorado Court of Appeals case provides that continued employment is not sufficient consideration for a noncompetition agreement.

While it is important to secure a covenant not to compete to protect your customer data, the agreement should be narrowly tailored to prevent another “forehead-smacking” moment.
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Categories: Management & Leadership