This past month two clients asked me to implement their objectives by drafting language for non-compete agreements, which we lawyers brilliantly refer to as NCAs. These two clients, engaged in different contract negotiations, presented me with diametrically opposing requirements. The employer client sought to “handcuff” her professional staff post-employment. And of course, the professional employee client sought a key to unlock his employer’s handcuffs. What irony. I love this job!
NCAs impose legal protective restraints of trade. Implementation must address two problems. Most people misunderstand their acceptable uses. And, of course, those who read contracts before signing them understandably focus on the finance and control language and quickly “glaze-over” the NDA provisions. In doing so, they fail to address two fundamental business law axioms. (1) The only thing worse than no deal is a bad deal. (2) The law holds you accountable for anything you sign.
NCAs are effective only when their reasonableness is documented and demonstrable. Documentation is neither time consuming nor expensive. The only drawback is the inherent annoyance of working with a lawyer. When thinking about NCAs, one should consider the whole little family of lawful restraint of trade vehicles: non-competition, non-solicitation, and non-disclosure agreements. Each is designed to mitigate a particular risk of unfair competition or misappropriation of assets, otherwise known as stealing. Non-competition agreements limit the ability of insiders and former insiders (employees, managers, contractors, partners, and M&A negotiation buyers and sellers) to exploit the principal’s business information, methods, and relationships. Non-solicitation agreements limit the ability of insiders to exploit relationships gained while working for the principal to “raid” the principal’s employees or customers. Finally, non-disclosure agreements prohibit the misappropriation and exploitation of the principal’s bona fide intellectual property.
To effectively address these concerns, a party must look down the road to the court house, my house. The courts are more comfortable enforcing non-solicitation and non-disclosure agreements. The courts certainly will enforce non-competition agreements, but raise a higher bar to do so. Courts enforce well-crafted agreements which do not over-reach to limit post relationship conduct beyond that reasonably necessary. Courts balance the principal’s property interests with a concern about unreasonable restraints of trade, i.e., preventing the former insider from using his or her training to work. In other words, it is not enough to simply toss vague or over-broad restraint language into an agreement.
The restraint to be enforced must be tailored to a real need and make economic sense. For example to effectively “shelve” a person post- employment, the principal must be able to show that that person’s knowledge and/or relationships are fundamental to its well being, disclosure or use will cause injury unfairly. Overreaching and under-preparing may trash any safeguards, allowing the “horse out the barn door.”
The legal hurdles to jump (second horse metaphor) notwithstanding, the CEO’s compliance with his or her fiduciary duty (I repeat – fiduciary duty) to protect company assets is neither difficult nor resource consuming. Also, the benefits of timely action greatly outweigh the cost of belated reactive efforts (litigation) and potential loss of asset value. Generally, the endeavor is managed by a small team including someone who knows the law (lawyers are good), and managers who know the principal’s finances, operations, and sales. The team audits the principal’s assets to identify its intellectual property (IP), designs and documents a reasonable policy, crafts enforceable relation/contract language, integrates the policy into operations, and educates the workforce. The turn-around is relatively short compared to other lawyer work.
While the focus of the potential hire, partner, contractor, or venturer is different, they apply the same analytic principles to review restraint of trade agreement language. They must consider the proffering principal’s actual requirements. But ultimately, their task is to assess their skills and the industry to determine whether, having signed the agreement, they will be able to earn a living if the relationship “goes south.”
The expression, “he (she) who hesitates is lost” certainly applies here. Both principals and employees do themselves irreparable harm (I repeat - irreparable harm), if they delay in addressing these issues until they are looking at the back-side of that horse now out the door and down the road. Once an agreement is inked, most courts have reservations about enforcing a post-agreement retro-fit. And, once they sign on, insider options are limited primarily to hiring an attorney to figure out how to run the traps, negotiate new language, or “trim the sails” of their next endeavor.
Addressing unfair competition and restraint of trade issues in a timely and effective manner is neither unreasonably costly nor time consuming. And, if an attorney does the work, it can’t be all that complicated!