Noncompete Agreement.

• Author: Sisca, Eileen R.

An employee who leaves a CPA firm--taking clients and proprietary or confidential information with him or her--can cause it to suffer significant losses in income, or other damages. How can a firm protect itself from such loss? One solution, while not foolproof, is to require its staff to sign a "noncompetition" ("noncompete") contract that says they agree not to compete with the firm for a specified period of time following their termination or resignation.

What the agreements cover

Typically, noncompetition agreements require employees to agree to the following:

* During the term of their employment with the firm, to fully devote their time, services, attention and effort to the performance of their duties and to the promotion of the business and the interests of the firm.

* During the term of their employment and for a specified period thereafter (typically 1 to 3 years):

--- Not to serve as employees, officers, directors, managers, members, partners or joint venturers in, or as proprietors of, a business that is similar to the business engaged in by the firm.

--- Not to solicit any clients of the firm.

--- Not to solicit or hire any employees of the firm.

--- Not to use, or disclose to any third party (including any new firm), any proprietary or confidential information (including processes and know-how), whether it relates to the firm and its business or to its clients and their respective businesses, and to return to the firm, at the end of their employment, all documents and computer files containing any such proprietary or confidential information.

Noncompetition agreements sometimes require employees to refrain, following their termination or resignation, from any disparagement of the firm or its partners or employees.

Reasonableness of terms

In general, the more reasonable noncompete agreements are, the more likely they are to be enforced by the courts. Courts generally consider three issues when determining if a noncompete agreement is reasonable:

1. The length of the postemployment, noncompetition period.

2. The geographical area in which the employee is prohibited from competing.

3. Whether the restrictions are reasonably necessary to protect the legitimate business interests of the firm.

The enforceability of noncompete agreements varies from state to state. Because of this, CPAs should not require an employee to sign such an agreement without first consulting with an attorney who practices in the state(s) where the firm does...