The Long Goodbye: Departing Employees & Covenants Not to Compete
Many an employment relationship, which began with high expectations, and rosy visions of success, ends up on the rocks of disillusionment and mutual distrust. As a new employee or member of key management begins with a firm, there are usually mutual benefits to each of the parties. The new addition brings knowledge of a given market, technical expertise, and other characteristics attractive to the new company. By the same token, the new firm will offer attractive incentives, based on future performance, many times with promises of advancement and potential partnership.
When these expectations are not met, the relationship deteriorates into mistrust and resentment. This is the setting for the perfect storm. Ultimately when the employee or partner leaves, there is a mad rush to nail down clients, contacts and information. In this rush accusations are frequently made that one party or the other is interfering with existing contractual relationships.
Enter the covenant not to compete. Many mangers and companies require employees to sign contracts containing language restricting the departing employee from contacting clients or from competing in a given area for a period of time. The covenants also require the departing employee from taking “trade secrets” or commercially sensitive information and using it when they leave.
But it is not as simple as all that. The law disfavors contracts which restrict trade- this is America after all. As a result, the law requires very narrow parameters to make the agreement enforceable. It must be given at the time of hire or “bone fide advancement”. Many employers, sensing trouble in the ranks, ask employees to sign a covenant after the fact. The courts have held there is no additional consideration for the agreement and these agreements are unenforceable.
The agreement must also be reasonable in time and duration. A covenant for five years and covering the Western United States is unlikely to be upheld. A year and a radius of 50-100 miles will probably make the cut.
Then there are “trade secrets”. Much as every company would like to believe its information is as valuable and unique as the formula for Coke, the fact of the matter is that in most sales jobs, where client information is generally available in the phone book, it is very difficult to make out a case for theft of trade secrets. Pricing guidelines and structures while proprietary, are not “trade secrets, and again proving their misuse is extremely difficult. Employees leaving technical firms or firms involved in production are more likely at risk for violating “trade secrets”.
In the heat of the departure, cooler heads may not prevail. As management rushes to secure relationships, they may err on the side of discrediting a departing employee. A departing employee, once gone, may be overzealous in trying to secure the relationship moving forward. In either case, statements made should be very carefully considered. Most suits involving departing employees have claims for intentional interference with business relations and at least some allegation relating to defamation.
Finally, when the dam breaks, it is a flood. Claims for departing employees are usually brought by provisional process, or Restraining orders. Aside from the potential for attorney fees, these suits are costly up front, and require posting of a bond before moving forward. While some claims are undoubtedly justified, the both former employee and employer should weigh the costs of litigation and potential for failure or success against the real impact of the departure before embarking on a suit to enforce a covenant not to compete.