The importance of requiring an employment agreement

In this paper I will shed light upon the impact of requiring employees to sign an employment agreement that they will not work competitors for a specific period of time or reveal internal company information to subsequent employers.

What happens when a valued employee leaves the job only to set up

a business in competition with the former employer?

The New York case of DoubleClick v. Henderson illustrates some of the pitfalls of attempting to compete with one's employer where trade secrets and confidential information are concerned. DoubleClick, which sells advertising on the Internet, sued two of its former key employees, David Henderson Jr. and Jeffrey A. Dickey, after both decided to launch a competing business.

Both Henderson and Dickey had entered into confidentiality agreements upon employment with the advertising firm of Bozell, Jacobs, Kenyon & Eckhardt Inc., which later merged with DoubleClick. Dickey also entered into an agreement that restricted him from competing with his former employer, Bozell-later DoubleClick, for one year after leaving his job there.

As important employees in the organization, Henderson and Dickey had access to certain allegedly confidential information. DoubleClick found out about their plans to compete and sought a preliminary injunction to bar them from engaging in business activities in competition with DoubleClick.

The court concluded that DoubleClick's confidential information about its pricing and customers amounted to trade secrets that Henderson and Dickey would “inevitably use.” The court reasoned furthers that Henderson and Dickey owed DoubleClick, as their employer, a duty not to divulge confidential information. The court noted, however, that employees “may secretly incorporate a competitive business prior to [their] departure.” But they must not use the employer's “time, facilities or proprietary secrets” to build the competing business. As a result, the court said, it was not necessary to determine the viability of the confidentiality agreements and Dickey's covenant not to compete. The court said that even without such an agreement a former employee is barred from soliciting customers to a competing venture through the use of fraud, trade secrets or confidential information.

Need for Non-Compete Agreements

Today's technology has created a heightened demand for skilled tech employees. As a result, the employment market is saturated with new opportunities and financial incentives for high-tech employees. Unfortunately, employers are competing for the same small pool of talent. Of course, attracting the employee is only half the battle. There’s an old proverb that says, “Knowledge is power.” This has never been more true than this age of information when companies increasingly value, manage, and leverage their knowledge assets Today, it is important for all businesses to protect their knowledge and the trade secrets they possess, and try to prevent it from walking out the door. This happens when an employee leaves the company with confidential and valuable knowledge with them, as seen in the DoubleClick v. Henderson case. Some employers have attempted to curb the tide of high-tech departures by offering enhanced compensation and benefit plans. Indeed, some companies offer rich stock-option plans, luxury cars or other “perks.” However, many companies still experience double-digit turnover rates. There are many tools businesses can employ to protect the information they have acquired. One of the most important legal options to protect employer’s internal assets and information from misuse by employees or inside personnel is the non-compete agreement. So, why would anyone sign a non-compete agreement? When a good job offer presents itself, sometimes the immediate future goes out the window. Years down the road, it is hard to believe that a dispute could arise because one will leave the business and go head-to-head with the competition - the former employer. It happens, though, and some live to regret entering into such agreements made in haste. Before signing a non-compete agreement, due consideration should be given to the precise meaning of the restrictions and their legal as well as practical implications.

History behind Non-Compete Agreements

Although non-compete agreements have been used for many years, rapid development within the high-tech industry may be a catalyst for changes in this area of the law. That is, the traditional standard of what is reasonable within industries such as manufacturing or sales may not be applicable in the rapidly changing world of the Internet and other technology industries.

What are Non-Compete Agreements?

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History behind Non-Compete Agreements

What are Non-Compete Agreements?

Non-compete agreements are legal contracts between employees and employers that govern what company information can or can’t be used by current or former employees. This provision prevent ex-employees from working for a rival, starting a competing business, contracting company’s customers, disclosing trade secrets and so on. In the non-compete clause the employee agrees that for a certain amount of time after he or she stops working for the employer, the employee will not become employed by a competitor company or any company engaged in a similar type of business, and the employee will not set up a company that will compete with the employer's business or solicit the employer's customers. Usually the noncompetition clause is limited to a particular geographic area.

Various Uses of Non-Compete Agreements

The non-compete agreement has become especially popular in this era of knowledge-sensitive high-tech firms. Lawsuits over proprietary technical information are reportedly at an all-time high in areas such as Silicon Valley. The combination of a strong job market and an attitude in some companies that makes employees feel as if they’re dispensable commodities has often led to very weak worker loyalty. Non-compete agreements are often seen as a response to this problem. A non-compete agreement does not have to pertain only to high-tech firms. Non-compete agreements can be equally useful for any business that has a customer list. After all, if the company’s best salesman or producer leaves the company and is allowed to take his or her account list, the company could be in for trouble. Non-compete agreement should also not be seen solely as protecting the rights of employers over employees. In truth, well-written agreements clarify the rights of both sides and can prevent costly lawsuits. Non-compete agreements are perhaps the lowest cost of protection for an invention. Often a simple agreement can be obtained for little to no cost. The agreements provide broader protection than patents, which is a reason justifying simultaneous use of non-compete agreements and patent applications.

Do’s and Don’ts of Non-Compete Agreements

Breadth includes both positive and negative aspects. Broad protection is beneficial at nearly any time. Most creators of non-compete agreements, however, struggle in determining exactly what is and is not covered under the terms of the contract. A common example is where there is no recording of what information was communicated during the discussion. The ambiguity can lead to problems should the matter ever come to litigation. The disclosing party wants the contract interpreted broadly including all information related to the actual disclosure, whereas the disclosee may wish to interpret the coverage much more narrowly. This can be a costly issue to resolve.

There is an old adage that a contract is only as good as the person signing it. One is safer using a non-compete agreement with those people of known high integrity and is of little value with person having low integrity. This integrity problem is compounded with the inventor's inability to monitor the disclosee. Often people will not have a non-compete agreement signed by persons having high integrity, but this leads to the next problem.

Each State has laws regulating the validity of non-compete agreements and other such contracts. Some states show little concern for non-compete agreements and regularly find them invalid. Should the contract be flawed, it may provide no protection at all. In some states one invalid clause will invalidate the entire contract. One can guard against this problem by seeking legal counsel on the validity of the contract before reliance is placed on it.

Types of Legal Agreements I Recommend to our Management

There are four types of non-compete agreements that I recommend the company’s management should implement in order to restrict employees’ use of company information.

The classic non-competition agreements typically prohibit an employee from working for the competitor of the employer, or from competing with the employer once he or she ceases employment. The benefit of this agreement to the employer is that it prevents employees from using acquired information for the benefit of a competitor. It is best used when the employee will have access to sensitive information. In general, courts will only enforce a restrictive covenant if the prohibited activity has some relationship to the activity that the employee actually performed for the former employer. For example, courts would likely enforce a covenant that prohibits a computer salesperson from working in the same job for another employer in the same industry. On the other hand, a court may decline to enforce an agreement that would prohibit that same computer salesperson from working as a salesperson in an unrelated industry. Many courts may even be reluctant to enforce a provision that would prohibit the computer salesperson from working for a direct competitor if the employee was hired to perform a completely separate job. In that case, a court may find that the employer's interest in prohibiting competition in general is not outweighed by the employee's right to work. For example, in Firearms Training Systems, Inc. v. Sharp, the Georgia Court of Appeals struck down a non-compete agreement that prohibited the director of sales from working with a direct competitor in any capacity. That is, the agreement purported to prohibit the employee from working even as a secretary for a competitor. The court found that such a restriction is unreasonable.

Non-solicitation agreement typically prevents former employees from soliciting, contracting or transacting business with the employer’s existing customers. It is used to prevent employees who are leaving from taking the clients of the former employer with them.

Non-disclosure agreements prevent employees from using their former employer’s trade secrets, proprietary information and/or confidential business information, or disclosing this information to third parties, or disclosing trade secrets to competitors or for a competitor’s benefit.

Confidentiality agreements inform the employee that the employer intends to keep certain information confidential. An employee confidentiality agreement is a contract or part of a contract in which the employee promises never to share any information about the details of how the employer's business is conducted, or the employer's secret processes, plans, formulas, data, or machinery used, such as the price the company has charged for its products. Usually a confidentiality agreement lasts even after the employee no longer works for the employer. It is similar to a non-disclosure agreement, except that it works both ways, the non-disclosure tells a former employee that he or she can’t give competitors confidential information; the confidentiality agreement says that you as the employer must also keep the information to yourself.

For example, take Amy, a former executive at WebCo, a developer of Web-based applications. Amy, who reported directly to the president, had increased sales by more than 35 percent. When the president announced he would promote his son as his successor, Amy left and took a position with a competitor. Two days after she started her new job, WebCo filed suit against her and her employer to enforce a non-compete agreement she signed when she started at WebCo. Amy had agreed not to work for a competitor for one year after leaving Webco. Ultimately, the court found the agreement enforceable. Amy's new employer fired her for not disclosing the agreement before she was hired.

Ethics and Morality of Non-Compete Agreement from Employee Perspective

The ethics of non-competition clauses in general is a challenging issue for employees, who have little option but to sign them if they want to be hired. From an egoistic point of view of an employee, the restrictive clauses in the employment agreements are not in an employee’s best interest. This is because these clauses constraints employees freedom. Courts are concerned about unduly restraining trade and limiting an employee's ability to earn a living. Accordingly, courts will attempt to balance these interests and only enforce restrictions that are reasonably necessary to protect the employer's interests. In many cases requiring such an agreement is a reasonable protection of the employer's client lists and inside information. Thus, requiring employees to sign restrictive clauses in an employment agreement is valid and essential.

Ethics and Morality of Non-Compete Agreement from Employer Perspective

From an egoistic point of view of the company, the non-compete clauses in the employment agreement are in the company’s favor and best interest. The clauses allow the company to protect intellectual property and help recognize that the relationship employee have been able to develop with clients is not personal, but as a representative of the firm. In a sense business contacts are the property of the employer, not the employee. Although some states have severely restricted these agreements, most courts recognize that an employer has a legitimate interest that must be protected.

Examining the restrictive clauses in non-compete agreement from a utilitarianism point of view, both the employer and the employee are effected. The utilitarian moral doctrine states that we should always act to produce the greatest possible balance of good over bad for everyone affected by our actions. For that reason, these agreements need to be set up to so that the employer’s interest are effectively addressed and at the same time the employees needs must be addressed in an equally just manner. Thus, to make non-compete agreement ethical for both parties, the terms and conditions need to be more balanced. The terms need to be more reasonable for the employee as well as the employer and protect and grant rights equally.

Conclusion

As demonstrated in the case of DoubleClick v. Henderson, Firearms Training Systems, Inc. Vs. Sharp and WebCo, in nut shell, the best alternative to our companies’ policies is the enforcement of non-compete agreement for all the current employees and the future ones. Low cost and broad protection makes the non-compete agreement a valuable tool in current circumstances of our company’s standing in today’s market. And this will also help us to prepare our company to deal with any misconduct that might hurt us in the long run. However, from the ethical perspective, in order to be fair with both the employer and employees, the agreement must be written balanced out by granting equal rights to both parties and adjusted to favor the employer and the employee reasonably on the situational basis.