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Employment Agreements: When to Use Non-Competition and Non-Solicitation Clauses
In today’s marketplace, employees change jobs frequently as certain skill sets are in high demand. Many Utah businesses do not adequately protect themselves for the potential departures of these special high performing employees.

In today’s marketplace, employees change jobs frequently as certain skill sets are in high demand. Many Utah businesses do not adequately protect themselves for the potential departures of these special high performing employees.

Recently, Ford Motor Company filed suit against a past marketing executive who, after leaving Ford, took a job as President of a large Toyota distributor. Ford’s concerns included the possibility of its former employee taking valuable business knowledge and giving that to a direct competitor. The former Ford employee had signed a non-compete agreement that prohibited him from engaging in a similar business or otherwise competing with Ford for two years after leaving the automaker. Ford is attempting to stop its former employee from starting his new position with Toyota and requesting that he return his signing bonus.

A well crafted non-compete or non-solicitation clause in employment agreement with strategic employees can protect both large and small businesses from losing valuable business information when an employee leaves the company. Non-compete agreements must meet specific criteria to be valid and enforceable, but a former employee who is properly bound by a valid non-compete can save an employer time, money, business secrets and even customers.

Non-Compete Agreements Protect Valuable Business Information

A non-compete agreement, also referred to as a covenant not to compete, is a contract between the employee and employer that prohibits an employee from working for another competing business or participating in activities deemed competitive during the course of his or her employment as well as for a certain period after leaving the business. A non-compete is generally limited to a specific geographic area and specific profession or trade.

When employees work for a company, they learn insider company information, including best practices, operations strategies and trade secrets. Employees may also have access to sensitive information such as upcoming product releases, marketing plans and customer or client lists. Non-competition agreements stop former employees from using confidential business information gained in one position in another job at a competing business. A non-compete can safeguard your customers or clients from being stolen by the former employee.

Generally, non-compete agreements are enforceable if:

  • Supported by consideration or something bargained for, such as a signing bonus
  • Bargained for, in good faith, by both or all parties
  • Necessitated by a company’s legitimate business interests
  • Limited in scope to a specific geographic area and time

In Utah, non-compete agreements must be drafted carefully. A blanket non-compete that is written too broadly and essentially does not allow a former employee to work anywhere, may not be enforceable. Courts will review whether the non-compete was written appropriately for a specific employee when deciding whether to uphold the agreement. A court may or may not uphold boilerplate agreements that have not been tailored to the specific employee, company or industry.

When is a Non-Compete Necessary and How Broad In Scope Can It Be?

A business may want to consider non-compete agreements for key employees. Upper level management, technical people with strong engineering, computer programming and creative skills, and top performing sales personnel may all be employees for whom a non-compete agreement can protect business interests. Any non-compete must explain why the employees skills are unique and what business interest will be protected.

The scope of the agreement will be scrutinized closely by the court if the validity of the non-compete agreement is contested. The scope of the agreement must be reasonable. Generally the amount of time covered by the non-compete agreement should provide the employer enough time to hire and train a replacement. When considering the length of time for a non-compete, businesses may want to also consider the time it will take the new employee to develop contacts with clients.

The geographic scope of a non-compete agreement or clause defines where an employee cannot directly compete with a prior employer. Businesses may reasonably restrict former employees from competing in locations where they do business. If a company has offices in Utah, Arizona and Colorado, a non-compete might encompass these states. However, a local Salt Lake City service business may only need a non-compete for the city.

Following a Breach of a Valid Non-Compete Agreement, Remedies Are Available

If a past employee breaches a non-compete by taking a job with a direct competitor, an injunction may be granted to stop a former employee from causing irreparable harm to the former employer. Additionally, employers may be able to recover monetary damages for loss of profits. Utah courts have stated that the focus in awarding damages is on placing “the non-breaching party in as good a position as if the contract had been performed.”

Businesses need to pay attention to activities of former employees, as well as consider the work histories of new employees. In some cases a company looking to hire a new employee may not realize the employee is bound by a non-compete from a former or current employer. An employment and business law firm can assist in enforcing an agreement not to compete.

A Non-Solicitation Agreement May Work

In some situations a non-solicitation agreement may adequately protect business interests. An employee is only barred from soliciting the employer’s customers on behalf of another business under a non-solicitation agreement. The non-solicitation agreement is limited to just the clients the employee worked with during his or her employment.

Because non-solicitation agreements are much narrower, courts are generally more likely to enforce them. These agreements may be appropriate for salespeople who work a specific territory, barring them from soliciting business based on the goodwill they developed working with specific customers while employed by the company.

In a fluid labor market employers need to protect confidential and sensitive business information. A well tailored non-compete and/or non-solicitation agreement can prevent former employees from using confidential information after leaving employment. When questions arise regarding the protection of business interests, contact a local business attorney to discuss whether a non-compete or non-solicitation agreement might be appropriate.

 

Keywords: Non-Competition Agreement, Non-Solicitation Agreement
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