When a partner* leaves your company, it poses a threat to your business if he decides to compete against you by starting a new venture or going to work with one of your competitors.
So, what can you do to prevent this from happening?
Noncompete Agreement
For prevention, a noncompete agreement may be the solution you need – either as an independent contract or as part of the partner’s employment agreement.
Although agreements not to compete are disfavored by courts as a matter of public policy, such written contracts can be enforceable if they are reasonable in scope as to (1) time, (2) geographic area, and (3) subject matter.
Related Article: Non-Compete Agreement – How To Make It Legally Binding
This is a fact-intensive inquiry. What might be reasonable for one company may be void with respect to another.
However, here are a few general guidelines on these three key factors.
(1) Time
Courts generally find time restrictions of 12 to 36 months to be reasonable. However, a 10-year restriction on competition is almost guaranteed to be invalidated as excessive.
(2) Geographic Area
If your company does business only in the City of Dallas, Texas, an agreement not to compete in that geographic area is likely to be reasonable.
On the other hand, restricting your former partner from doing similar work throughout the entire State of Texas would probably be invalidated for areas beyond the Dallas metropolitan area.
Why? Because if you’re not doing business in Houston, it’s unreasonable to prevent a former partner from setting up shop there.
(3) Subject Matter
The noncompete agreement should relate to your company’s business activities and the role the former partner had within your company.
For instance, if your partnership owns a restaurant and the former partner was in charge of sales and marketing, it would probably be unreasonable to prevent him from going to work at a another local restaurant as a sous chef.
Similarly, an agreement not to compete would be unenforceable to prevent him from opening up a car dealership across the street from your restaurant because it would not be competing with your venture (selling cars instead of selling meals).
Theft and Misuse of Intellectual Property
If you don’t have a written noncompete agreement already in place, there’s a slim chance to get a departing partner to sign one in exchange for you providing him something of value (e.g. money) he wouldn’t otherwise be entitled to upon leaving.
However, if he refuses to sign an agreement not to compete, you may still be able to limit his ability to do so if his new role would require the misappropriation of your company’s trade secrets or other intellectual property. This is true whether or not a confidentiality/nondisclosure agreement has been signed by him.
Of course, it makes sense to put a noncompete agreement and other business contracts in place prior to any partner making a decision to leave. An experienced business lawyer can prepare these legal documents to help you protect your company’s interests.
* For purposes of this article, the term “partner” is used. However, the strategies and tactics described here can also apply to other types of equity owners, such as a corporate shareholder or a LLC member.
