Beating the competition: The art of crafting non-compete agreements
By Dan Ballou
ROCK HILL, SOUTH CAROLINA – In today’s business world, the value of a company is often defined as much by information and relationships as by the actual products or services provided. At the same time, employees are more transient than ever before, and employers need to know that when (not if) change occurs, employees will not take the “keys to the kingdom” to a competitor in the market. As a result, businesses now more than ever are looking to agreements that restrict an employee’s ability to do just that. Typically known as covenants not to compete, or by the less wordy “non-compete,” these agreements are an important part of modern business practice, but must be carefully drafted to accomplish their intended purpose.
Whether you are an employee or an employer, it is important to understand the benefits and limitations of non-compete agreements, and how they might affect your business practices and operations. Restrictive covenants can be found in a wide variety of industries, including medicine, accounting, information technology, sales, entertainment, and surprisingly enough, even sandwich making. (Jimmy John’s famously requires its employees to sign non-competes as a condition of employment.) Particularly for companies that rely upon specialized business practices, the knowledge gained by key employees in the course of the employer’s business quickly becomes a significant asset of the company, and one that the company is anxious to protect if the employee moves on.
As in most states, South Carolina courts are generally reluctant to restrain a person’s right to work in their chosen field, and the assumption is that without an enforceable agreement to the contrary, an employee is always free to work in whatever career she wants. However, when presented with a properly drafted and reasonably limited agreement, courts will not hesitate to enforce such an agreement by injunction, money damages, or both. Understanding the basics of these non-compete agreements is important because it is a zero-sum game; such agreements are typically found by courts to be either reasonable, and therefore enforceable, or unreasonable and thrown out. Once a dispute arises, a South Carolina court, by rule, may not go back and insert terms to make an otherwise unenforceable contract more “reasonable.”
Non-compete agreements must have limits
First, like any contract, non-competes must be supported by adequate consideration to be enforceable. Simply put, this means that an employer cannot just walk into a employee’s office and demand she sign an agreement that she won’t work for a competitor if she ever leaves the company. Something of value, usually money, has to be given to the employee in return for her commitment to restrict her options if she leaves. More commonly, if a company knows it needs such protection before hiring, the agreement can be included as a part of the original employment agreement, and the agreement to hire is often found to be sufficient consideration. Non-competes are also commonly used when buying and selling a business to insure continuity after closing and make sure the former owner does not use the proceeds to set up a direct competitor. In those situations, the purchase agreement typically designates some portion of the purchase price as consideration for the covenant not to compete.
To be enforceable, the restrictions placed on an employee must be reasonable, which means they cannot be overly broad, and cannot last forever. For instance, if a company loses its key salesperson who controlled a substantial book of business with extensive customer contacts, an agreement that purports to prevent her from ever selling a competitor’s product to any customer for the rest of her life will likely be struck down as an unreasonable restraint of trade. Instead, the agreement should incorporate reasonable geographical and time limitations that are appropriate for the particular employee and the company.
Enforceable agreements will often describe a radius around existing markets as protected territory, or be limited to the regions in which a company actually does business. They also frequently state a specific time limit of months or years during which an employer may protect its customer and market contacts after an employee’s departure. It is important that these limitations be drafted reasonably according to the fact-specific considerations of the employment relationship. A 6-month non-compete may be appropriate for one situation, while a 5-year provision may be reasonably necessary for another.
Protecting the business and employment interests of employers and employees often includes a variety of tools in addition to non-competes, including non-solicitation, confidentiality and non-disclosure agreements, all of which must be carefully drafted in light of the specific facts of each case. While there may be a temptation to download form agreements off of the internet, consulting with a licensed attorney from the outset is critical to put into place agreements that accomplish what the parties desire before they get into an expensive and time-consuming lawsuit.
Daniel J. Ballou is Senior Counsel with Morton & Gettys Law Firm in Rock Hill, SC. His practice includes business and corporate law as well as litigation.
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