The first known legal decision on a non-compete agreement was just over 600 years ago, and it didn’t go well for the employer. Non-compete agreements have survived because creating intellectual property takes time and money. In business, the motive for investing these resources is profit, and many of us would not bother to spend our time and money if other people could simply walk off with the source of our profits.
Copyright, trademark, and patent law protect most, but not all forms of intellectual property. Trade-secrets law helps fill these gaps. When revealing trade secrets to an employee, an employer can protect the secrets via contracts, such as non-compete agreements. The difficulty lies in enforcing the agreement and proving a violation when one exists.
What Are Non-Compete Agreements?
According to the recent Fair Labor Standards Act (“FLSA”), a “non-compete agreement” is an agreement between an employer and their employees “that restricts such employee from performing, after the employment relationship… terminates (1) Any work for another employer for a specified period of time. (2) Any work in a specified geographical area or (3) Any work for another employer that is similar to such employee’s work for the employer that is a party to such agreement.” In addition to this generalized definition, the Act explicitly states it does not prohibit agreements that forbid the disclosure of trade secrets.
Non-compete violations include:
Sharing trade secrets
Revealing confidential business information
Sharing customer lists
Divulging special training programs
Exploiting existing customer relationships
If a current or recently former employee with access to your companies trade secrets (e.g., expansion plans, customer data, and marketing strategies) has quit and immediately takes a job with a direct rival, your concerns are justifiable. Because of this, many employers use non-disclosure agreements to keep business secrets out of the hands of the competition.
However, knowing that your former employee is now working for your direct competition how can you be sure they are keeping to the non-disclosure and not sharing your secrets? In all practicality, you really can’t. This is why non-competes exist.
Complying with or violating a non-compete agreement is easier to confirm than with a non-disclosure agreement. Although, there are at least five obstacles an employer must overcome before the court will enforce a non-compete:
The agreement is to protect a valid business interest such as trade secrets and goodwill.
It must have a reasonable duration, e.g., two years.
It must have a practical geographic scope, which will depend on the extent of the business’ reach. The court may uphold a worldwide ban for a genuinely global enterprise, but not for a company whose market reach is only 25 miles from its store.
The competitor must be direct, meaning for the same customers.
If the employee’s compensation or responsibilities have changed, the employee must have signed a new agreement.
When an Employee Leaves for a Competitor
Having agreements on paper will not do much to protect an employer’s interests unless that employer is willing to act to enforce their rights. All departing employees with non-competes should be consistently treated the same way.
Remind them of their continuing obligations to the agreement upon termination
Promptly investigate all cases where a violation of the agreement is reasonably suspected.
Take prompt legal action if there is sufficient evidence of non-compliance.
Assess the Situation
The employer should evaluate whether the employee’s new position with a competitor is a threat to the employer’s trade secrets, confidential information, and goodwill. Employers should not delay in these situations as it may hinder the ability to obtain legal protection. The following questions should be answered as soon as possible to determine the appropriate response:
Is the new employer or new business a competitor?
What activities will they be performing for the new employer? (e.g., calling on the former employer’s clients for the new employer or sharing trade secrets and confidential pricing information?)
Will their activities be in breach of one or more covenants included in the agreement?
How will your company be harmed? Will you lose customers? Will important trade secrets be shared?
When you believe there has been a violation.
When you have a suspicion or even evidence that a current or former employee has breached the non-compete agreement, violating your trust, your instinct may be to contact your attorney to send a cease-and-desist letter. If you are at that point, however, damage has already been done. Stopping their behavior now may prevent you from obtaining the evidence needed to legally recover your damages. Any cease-and-desist letters will alert them that you’re aware of their breach of the agreement. They will likely stop or even try to continue in secret to avoid penalty or legal action. This can make it tough to obtain the required evidence to develop a legitimate case against them.
Retaining the services of an experienced private investigator to conduct surveillance, contact and interview witnesses, obtain documents, use open-source data-mining and cell phone forensics to gather the required evidence should be your first step. This will grant the opportunity not only to halt any activities which are costing your company money but also to build a prima facia case against the violator and recover any economic damages.
The fallout from non-compete violations can be unpleasant, with former employees asserting that not only did they not violate the agreement, but that their former employer is harassing them. Private investigators, being a third-party, are wholly capable of objectivity. Regardless of who their client is, a private investigator’s fidelity is to the truth. Their goal is to gather the evidence to support that either the agreement was violated or that is wasn’t, whatever the case may be. This objectivity can be crucial during litigation when enforcing a non-compete agreement. The former employee will not be able to claim that the fact-finding was biased since the former employer did not conduct the investigation.
Take a step back
Being too close to an issue which is threatening the financial security and future of your company can set you up for failure. You are no doubt consumed with maintaining your business’ profitability and legitimacy, which makes it easy to act impulsively to safeguard your interests. Share whatever information you have already gathered and share it with the private investigator and allow them to build an actionable case for you.