Using noncompete agreements to protect legitimate business interests; carefully drafted agreements will prevent former employees from using and disclosing proprietary and confidential information.

• Author: Porter, William G., II

THE definition of "trade secrets" is broad, and both statutory and common law protect them from misappropriation. While this may appear to be sufficient protection, all organizations and companies have confidential and proprietary information that inevitably will fall outside any definition. Customer and client relationships, for example, generally do not qualify as trade secrets. In today's business environment, all information that provides a competitive advantage, which includes not only trade secrets but also much of other confidential information, has become increasingly important.

For these reasons, companies often use noncompete agreements, which also are referred to as restrictive covenants, to protect their non-trade secret confidential and proprietary information and their customer relationships. Noncompete agreements generally prohibit employees from competing against the company, from soliciting the company's customers, and from disclosing any of the company's confidential information--be it a trade secret of something else--both during and after the term of employment.

ENFORCING NONCOMPETE AGREEMENTS

Most jurisdictions, with California being a notable exception, recognize and enforce noncompete agreements. Florida, for example, has enacted a comprehensive statute to regulate both noncompete and nonsolicitation agreements under the title "Valid Restrictions of Trade and Commerce Law". (1) Cases involving noncompete agreements are extremely fact-specific, involving an analysis of the agreement's terms and a weighing of the company's interests, the employee's interest, and the public's interest. Often, authority can be found within a jurisdiction for enforcing or rejecting the same noncompete agreement.

1. Rule of Reasonableness

   Courts will and do enforce noncompete agreements that are reasonable. To be found "reasonable" a noncompete agreement must meet four tests.

   * It must protect a company's legitimate business interest. If there is no such interest, there is nothing for the noncompete agreement to protect. The Florida statute, for example, requires the court to "construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established."

   * Its scope must be no greater than what is required to protect that legitimate business interest. For example, the agreement must have reasonable temporal and geographic restrictions.

   * It must not impose an undue hardship on the employee. Under the Florida statute, however, courts are expressly prohibited from considering "any individualized economic or other hardship that might by caused to the person against whom enforcement is sought."

   * It must not be injurious to the public. (2)

2. Consideration

   As when they consider any other contract, courts look to see whether the employee received consideration for signing the noncompete agreement. The amount or value of the consideration may not be a critical factor because, as the Ohio Supreme Court stated, "It is axiomatic that courts, as a general rule, will not inquire into the adequacy of consideration once consideration is said to exist." (3)

   Few questions are raised about consideration when the noncompete agreement is signed at the inception of employment. The job offer itself often constitutes adequate consideration.

   After employment begins, an employer can provide consideration for the signing of a noncompete agreement by a current employee in several of ways. Generally, a promotion, raise or bonus, will provide adequate consideration to support a noncompete agreement. Giving an employee who was previously an at-will employee a written contract that permits termination only for cause in return for signing a noncompete agreement also constitutes adequate consideration. (4)

   How about a promise of continued employment? Some jurisdictions do not view that as adequate consideration to support a noncompete agreement signed after the employee commences employment. (5) Other jurisdictions take the opposite view. (6) In other jurisdictions, there is a split of authority over whether the promise to continue employment, without more, is sufficient consideration to support a noncompete agreement to be signed by a current employee. (7)

   The most prudent course is to assure that the noncompete agreement is entered into at the inception of employment or, alternatively, at some other point during the employment relationship when the employee receives a promotion or additional compensation. This consideration should be specifically mentioned in the noncompete agreement itself.

   LEGITIMATE BUSINESS INTEREST

   Noncompete and confidentiality agreements may protect not only trade secrets but also privileged, proprietary, and confidential information that would not qualify as a trade secret. (8) If the employer cannot demonstrate a legitimate business interest protected by the noncompete agreement, the agreement will not be enforceable in any respect. (9)

1. What Are Legitimate Business Interests

   1. Customer relationships and client contacts

      A company is entitled to protect its customer relationships or knowledge that employees gained solely as a result of their employment with the company. Generally, the more contact an individual has with a company's customers, the more likely a court will enforce nonsolicitation provisions commonly found in noncompete agreements. (10)

   2. Loss of key employee

      One court upheld a noncompete agreement that allowed the employer an opportunity to "find a replacement and recover from the loss of an important/key employee." (11) Some courts will enforce noncompete agreements if the employee's services were special, unique or extraordinary, (12) but this requires more than showing that the employee's services were merely of high value to the company. (13)

   3. Non-trade secret confidential and proprietary information

      One court found "impressive testimony" of legitimate business interests evidenced by the former employee's knowledge of the company's "resources, markup structure, gross profit structure, personnel and business systems." (14) Another issued an injunction to protect what it deemed a legitimate business interest when employees were well-acquainted with the employer's internal structure, marketing methods, pricing structure and customer lists. (15) To ensure that this information is protected, the noncompete agreement must contain a separate provision that prohibits the employee from disclosing this information.

2. What Are Not Legitimate Business Interests

   1. Ordinary Competition and General Business Knowledge

      Ordinary competition and general business knowledge are not legitimate business interests. An employer may not use a noncompete agreement to prevent ordinary competition or, similar to the rationale for protecting trade secrets, to prevent employees from using ordinary skills they have at the time of hire or developed during the employment. (16)

   2. Mere labeling

      Merely labeling information as "confidential" does not create a legitimate business interest. Simply stating in a noncompete agreement that an employee has or had access to "trade secrets" or "confidential information" does not make it so. A court is not bound by the express statement that a company's secrets were "unique and extraordinary" in determining whether to grant injunctive relief. (17) Nor is simply writing that "customers lists are confidential" sufficient to show a legitimate business interest to warrant enforcing a noncompete agreement. (18) The employer still must prove that the information indeed is confidential and proprietary.

      TIME, PLACE, MANNER

1. In General

   There are a number of factors to be considered in determining whether a given restriction is reasonable. No one factor is determinative or...