Corporate Legal Advisors SM


Typical Scenario:

Pat, the owner of a successful business, never saw it coming. After years of building up a business, things seem to be going quite well. Then within the space of a few months, the business loses several key employees. The workplace mutiny leaves Pat feeling betrayed. But the worst is yet to come. Within the next few months, many of Pat's best customers are also gone. As a result, Pat's successful business is now struggling with substantially reduced revenues and no key employees to build back a successful customer base.
     It turns out that the first employee to leave had joined a rival operation, bringing customer lists, employee information, marketing tactics, etc. to the competitor. This ex-employee and the new employer set about soliciting both Pat's customers and employees.
     Since Pat was only discovering this after the fact, there was little to do to stop the customer/employee exodus. Once the customer or employee was gone; they were gone. Pat struggled on for another year. Pat is now an employee of a large competitor. So much for the American dream.

What The Big Companies Do:
It is standard practice for many large corporations to require a substantial percentage of their employees to sign written agreements to deal with the issues of competition, solicitation of employees/customers and confidential information.

The legal protections fall into three categories:
  • Non-compete agreements bar employees from competing directly with their old boss.
  • Non-solicitation agreements prohibit them from recruiting employees or customers of the business they left.
  • Non-disclosure agreements (also called confidentiality agreements) forbid them from using confidential or privileged information they gleaned at their former workplace.
A single employment agreement will usually include all three prohibitions.

Some of you have signed these types of agreements back in the days when you were an employee of the "Big Company." Some of you may not even have realized you did so. Just one of the many pieces of paper thrown at you when you first started working for the "Big Company" or at some other time during your employment by the "Big Company." Don't cause this to automatically reject the idea. Not everything the "Big Company" did was patently stupid. Just because you make it through a speed trap once, twice, etc. does not mean you will not be caught the next time.

Timing Is Everything:
In Minnesota, employee non-compete agreements must be presented to the new employee with or prior to giving an offer of employment to a prospective employee and the agreement must be executed by the employer and employee prior to the commencement of employment. As to existing employees, independent and adequate compensation must be given to the existing employee as legal consideration for the non-compete agreement. "Sign this or your fired" or other similar approaches definitely do not work.

Be Reasonable:
One advantage of being a smaller company is that it is less likely that you are using a sledgehammer to swat a fly if you seek enforcement of a non-compete agreement against your key employee(s). It is much easier for you to demonstrate the immediate harm when your one or two key employee(s) goes to a competitor or sets up shop across the street. However, too long of a time period for non-competition or non-solicitation after leaving and use of vague terms such as "indirectly competing" don't cut it. And, in certain types of businesses, much of what you consider "confidential", is actually common knowledge out on the street.

What About The Judge:
Court decisions in Minnesota and most other states set limits to what will be enforced. In fact, and why are you not surprised, some states, California being foremost, do not practically allow enforcement of non-compete agreements. Stated again and again in the court decisions is the basic belief that non-compete agreements are restraints on free trade and will be strictly interpreted and limited.

The three key aspects that are reviewed by the courts are:
  • scope of the prohibition,
  • duration of the prohibition
  • geographic area of the prohibition
As a good general rule, the narrower and shorter the prohibition, the greater the chance it will be upheld if challenged in a court.

Will They Sign It:
Also of critical importance is the fact that you want the new or existing employee to actually agree to the agreement. If you have a good argument for a limited scope, duration and geographic area; you have a better chance of getting the employee to sign the darn thing. Most importantly, focus on the key employee(s) who could seriously harm your business if the employee(s) decided to set up their own shop across the street.

Yes, recruitment and current employee retention is made more difficult when you impose non-compete agreements. But you won't have to spend every day worrying whether your key staff will walk out the door and set up shop with or as a competitor. If a potential or actual employee is not willing to sign a reasonable non-compete agreement, then maybe they are not the right employee for you..

The Devil Is In The Details:
There is no such thing as a standard form agreement that fits all businesses. In the end, what matters is whether the agreement is legally enforceable. And that issue is very business specific. That is, specific to your business as it exists at the moment the agreement is signed, not the industry in general and not where your business was at a few years ago or may be at a few years from now. As importantly, when, how, where and why the agreement was signed is critical.

In summary, you bet your business more often than you want just engaging in the business of business. Don't multiply the risks by ignoring simple procedures with your employees. Doing certain things that large companies do is not always bad.