Skip to main content
Tag

Non Compete Agreement

Can You Prevent A Former Business Partner From Competing Against You?

By Business Contracts, Business Lawyer

noncompete agreementWhen 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.

Non-Compete Agreement: How To Make It Legally Binding

By Business Lawyer

non-compete agreement

Although an employee non-compete agreement is disfavored as against public policy because it discourages commerce by restricting an employee’s right to work elsewhere or set up a competing business, generally such contracts have been enforceable if they’re reasonable in scope.

What’s a reasonable scope for an agreement not to compete?

Although there is no hard and fast rule because the laws vary by state, generally the scope of a noncompete agreement is considered reasonable if:

(a) it is for a short term (e.g. 1 to 3 years);

(b) covers a geographic area that’s consistent with the area where your company does business; and

(c) it only limits the same type of work as the employee is doing for you.

Consideration for a valid non-compete agreement.

In addition to being reasonable in scope, the employee must receive consideration (something of value) in exchange for signing the noncompetition agreement. In most cases, this can be satisfied by making the offer of employment to a job applicant conditional upon an agreement not to compete.

However, Dallas Business Lawyer Mike Young cautions against making the noncompete agreement a separate contract from the employment agreement instead of making it part of the employment contract. He said, “If you have a covenant not to compete as a separate contract, the employee may argue that there was no valuable consideration received in exchange for it. In Texas, that’s a difficult claim to make if the noncompetition covenant is within the employment contract itself.”

Related Article: Joint-Employer Liability – How To Avoid It As A Business Owner

Post-Hiring Noncompete Agreement

After an employee has been working at your company for a while, you may decide you want to protect your business by having the employee sign an agreement not to compete. This means that you’ll need to provide some valuable consideration to the employee beyond continuing his employment if you want the noncompetition agreement to be legally binding.

Your business lawyer can help you come up with the type of consideration that makes the contract binding but without costing you a fortune in the process. Common types of consideration given in exchange for a noncompete agreement to an existing employee include:

  • a small raise;
  • extra paid time off (PTO); or
  • increased employer contributions to the employee’s 401k.

Rather than incur an ongoing increase in expenses, some employers prefer to provide a lump sum monetary payment or pay for a short vacation as the consideration for the covenant not to compete.

Related Article: Can A Job Interview Create A Verbal Employment Agreement?

Are There Employees Ineligible for a Noncompetition Agreement?

Under the guise of protecting the consumer, there’s a recent trend by states attorneys general to crack down on employers who force low wage employees with minimal skills to sign noncompete agreements as a condition of employment.

For example, both the Illinois Attorney General and the New York Attorney General recently went after fast food franchisor Jimmie Johns for requiring low level employees to sign 2-year noncompetes that barred the employees from working for a competitor within two miles of a Jimmie Johns’ sandwich shop. In June 2016, Jimmie Johns agreed to stop this practice.

Had the sandwich shop franchisor limited its noncompetition agreements to executives and other upper management, it’s unlikely the chain would have been targeted by either state’s attorney general.

What About Independent Contractors and Covenants Not to Compete?

According to Business Lawyer Mike Young, there are additional dangers when having an independent contractor sign a non-compete agreement. Attorney Young contends that making an individual who is an independent contractor sign an agreement not to compete can be a factor used by a court or government agency to determine the individual is actually your employee. This can lead to liability for additional taxes, unemployment compensation, and workers’ compensation.

How to Get a Good Non-compete Agreement

Whether you want to use a noncompete agreement with a prospective employee, an existing employee, or an independent contractor, your business lawyer can advise you whether it’s feasible and draft a contract that’s designed to protect your interests from unwanted competition by your workers.

Non-Compete Agreement and Independent Contractors

By Business Contracts, Business Lawyer

Non-Compete Agreement and Independent Contractors

When you outsource work to an independent contractor, should the contractor be required to sign a non-compete agreement as part of the deal?

According to Business Lawyer Mike Young, it depends upon the circumstances.

Should Individual Freelancers Sign a Non-Compete Agreement?

If the work is to be done by an individual working as a freelancer, there’s a real legal risk that a non-compete agreement can make the worker an employee rather an independent contractor. If the worker is an employee, then you’re probably on the hook for payroll taxes, unemployment compensation and worker’s compensation insurance contributions, and compliance with applicable federal and state wage and hour labor laws.

Related Article: How To Avoid Uber’s Independent Contractor Agreement Mistake

Of course, there’s usually no way of know about this problem until the worker makes a successful claim against you for violating employment laws, files for unemployment compensation, etc.

Because of this risk, it rarely makes sense to have an individual working as an independent contractor to agree to a covenant not to compete with your business regardless of the scope of the agreement with regard to term, geographic area, and type of work covered as competing.

Business Entities as Independent Contractors

When you outsource work to a corporation or a limited liability company (LLC), it may make sense to require a non-compete agreement as part of the deal, particularly if there’s a real risk the contractor may take the knowledge acquired from you and misuse it to become your competitor.

Related Article: How To Make A Noncompete Agreement Legally Binding

Because the contracting party is a business entity instead of an individual freelancer, the risk of finding the contractor is really an employee is almost nonexistent even if the entity is owned by a single shareholder or member.

Confidentiality Agreements and Independent Contractors

Whether or not your contractor agrees not to compete with you, confidentiality agreements are important for protecting your trade secrets, customer lists, and other intellectual property (IP).

Drafted correctly, the agreement will cover how your important information is handled during the term of the agreement, after termination, and adequate remedies for breach to minimize damages if your contractor decides to violate the terms and conditions of the confidentiality agreement.

Single Contract or Multiple Agreements?

As a general rule, it makes sense to incorporate non-compete and confidentiality provisions into a single independent contractor agreement rather than having them as separate contracts.

Why?

Your contractor may be able to argue the separate agreements are unenforceable because they were signed without consideration, i.e. you gave nothing of value to the contractor in exchange for the agreements not to compete or keep your stuff confidential.

Related Article: How To Use Independent Contractor Agreements

On the other hand, if these provisions are included in the independent contractor agreement, it’s easy to identify what you’re giving to the contractor for them (e.g. payment).

An experienced business lawyer will be able to draft an independent contractor agreement that covers these legal issues and other important provisions you’ll need to protect yourself when outsourcing projects to others rather than having employees do the work. To learn more, check out our Business Contract Legal Protection Package.