Your business has something exceptional that no other business has; otherwise, you wouldn’t be successful. Maybe it’s a management style or the way you structure your business… Maybe it’s the particular niche market you’re in or the sheer strength and novelty of your business mind that has delivered your success… Whatever that something is, your employees know about it, and they do not have the same incentive to protect it that you do.
This means that your employees, even the low level ones, can run away with your business: they can steal your clients, your trade secrets, your business strategies, your business contacts, your designs, schematics, confidential client information; the list goes on. They can take what you do, undercut your price, and create their own version of the company you’ve worked so hard to build.
I know, I know; your employees would never do anything like that because they’re loyal and honorable. Trust me when I say that this happens more often than you’d think, and when it does no one expects it. Your employees may be the nicest people who go to dinner parties with you and are friends with all of your friends. But the more successful your business is, the harder it is to keep it safe. Your success puts a target on you. Why take the risk?
Employees can quit and start their own version of your business. As your employees, they have probably met the more important contacts you have that allow your business to thrive. They also know how to market towards your main customer base, and they don’t have to do all of the market research and testing that you’ve done, either. A quick news-cycle also makes it easy for them to spin the story in such a way that makes you look like the villain, and them the hero-underdogs. All of this is possible. It’s happened to my clients and it can happen to you.
Other risks present themselves when a larger company is looking to acquire your business. If you refuse their buyout offers, it’s all too common for your competitors to simply hire your executives and managers, learn from them, and apply all of that knowledge and training—read: your investments—to their own company.
The short answer is no, probably not. State law, and the judges that interpret them, are quickly moving against non-compete agreements. In general, most states either (1) throw them out altogether, or (2) severely limit their enforceability. It’s beyond the scope of this blog to get into the merits of this judicial decision, but if you’re a small to medium-sized business that has a unique business model or niche client base, this puts you at risk.
Why? Because most employment contracts made from 1990 to 2005 include these—now outdated— non-compete agreements. The contracts were made expecting the non-compete agreements within them to function as intended. But if this entire section of your employment contract is considered void, you’ll need something to replace it, and fast.
Thankfully, non-compete clauses are not the only way to protect your confidential information. There are a plethora of intellectual property protections and confidentiality agreements that exist. Intellectual property is governed by different court systems and different laws. While the enforceability of non-compete agreements, or lack thereof, is found in state law, intellectual property law is federal law; it’s protected by the U.S. Constitution, and the laws concerning it are promulgated by the U.S. Congress. You can find more specific blogs discussing how to protect your IP with copyrights, trademarks, patents, and Non-Disclosure Agreements with the corresponding links provided.
Another solution is to use basic contract agreements to protect your confidential information. This can work as a mutual non-disclosure agreement—NDA—, or can be added to employee contracts themselves. Bear in mind, however, that confidentiality contracts like these are a rapidly changing part of the law right now, and should probably be reviewed and/or drafted by a lawyer before you sign anything. And because it’s a contract, there has to be a quid pro quo (something of value given in return) for it to be enforceable, so pay special attention to the payment schemes. You don’t want your important contract to be held unenforceable for something as trivial as “lack of consideration.” (For more information on contracts see blogs here and here.)
If you haven’t revisited your employment contracts in 3+ years, you need to. Your employees and the competing businesses that would hire them may have the power to effectively steal your business. Non-compete agreements are no longer an adequate protection. This can be avoided, or at least you can significantly reduce the risk, by having your attorney update your contracts with new protections offered by intellectual property right assignments, confidentiality agreements, and non-disclosure agreements.
Jonathan Sparks is the executive attorney at Sparks Law, where he helps small to medium sized companies with their legal issues, general counsel and registered agent services.
Are there any blog topics you’d like to see? Any legal questions you’d like answered? Please feel free to leave them in the comments section or shoot me an email. I’d be happy to help out.
– Jonathan Sparks, Esq.