Non-Compete? Not That Simple

Without key protections in place, a determined competitor can hire away your star employees and help himself to your company’s proprietary assets. Here’s how to prevent it

April 10, 2015
An employee signing a non-compete document.

Bob Quillen, president of Quillen Bros. Windows, in Bryan, Ohio, was hurt, disappointed, and somewhat surprised when a little more than a year ago a key employee informed him that he was leaving to work for a competitor. In the weeks that followed, a half dozen production managers, techs, and measure men departed to work for the same competitor and Quillen was faced with hiring and training virtually an entire installation department.

Today, with replacements since hired and trained, he has all new hires sign a non-disclosure agreement, and Quillen says that his attorney is currently drawing up separate non-competes for the company’s offices in Ohio and in Indiana.

Put Protections in Place

Many home improvement company owners have at one time or other had a key staff person leave to work for a competitor, or actually become the competitor. Yet, when it comes to having the legal protections in place that would make competitors think twice about predatory recruiting, most people don’t, says D.S. Berenson, of Berenson LLP, an attorney whose Virginia firm has represented hundreds of remodeling and home improvement contractors. “And when they do,” he adds, “the agreements are really bad”—“bad” meaning that they are useless in court.

“The small ones think they don’t need it,” Yoho says, “and the moderate-to-growing ones overcomplicate it by creating a document that’s too stringent, that won’t pass surveillance in court if used for litigation purposes.”

Yoho suggests that, at the very least, a home improvement company’s salespeople should sign some form of agreement that would prevent them from walking away with confidential company information.

Trifecta of Protections

Three types of restrictive covenants—what Berenson calls the “trifecta of protections,” can shield your company from losing people, intellectual property, or trade secrets to competitors:

A non-compete agreement: In such a document, the employee agrees that upon leaving he or she will not, for a specified period of time, go to work for a company selling competitive products or doing business within the company’s specified market area.

Non-compete agreements are common but vary widely in what they include because what can legitimately be restricted in a non-compete varies from state to state. Some states limit the type of employee who can be included in such an agreement. (In California, for instance, non-competes can apply only to business partners.) In addition, courts (and juries) frown on non-competes as interfering with an employee’s mobility. “You can’t defend against a guy’s leaving,” says well-known industry consultant Dave Yoho. “He has to make a living.”

Non-disclosure/Do Not Disclose/ confidentiality agreements: Whether that departing employee can take your training manuals with him for use at a competitor is another matter, however. That would be covered under a non-disclosure agreement. The terms of this agreement specify that the employee will not share (specified) company assets with outsiders, including competitors. These assets must be listed and could include leads, marketing or sales scripts, training manuals, pricing formulae, and anything else you deem proprietary or confidential. Employees at Renewal by Andersen of Orange County, in California, for instance, sign a non-disclosure agreement rather than a non-compete because non-competes are “impossible to enforce in California,” says company president, Charles Gindele.

Non-solicitation agreements: In such an agreement, the employee agrees not to solicit a current or prior employee for the benefit of a competitor or himself. A non-solicitation agreement would, for instance, prevent your departing sales manager from contacting your top sellers or production manager and taking them with him to work for the competition.

Run It By Your Lawyer

Implementing one or all three of these protections is a two-step process. First, have a lawyer draw up the agreements. You can then either present them to the employee as stand-alone documents—Berenson suggests that doing so has more authority if you go to court—or simply incorporate them into your company’s employee manual.

Make sure that those pages are read and signed by the employee, and are filed by your company. “When you come to work for me,” says Mark Steinberg, owner and president of Gutter Shutter, a gutter protection manufacturer and multi-branch retailer in Cincinnati, “you go to a conference room and sit down with a fairly thick employee manual and fill out the documents inside.” Those include non-compete and non-disclosure agreements prepared and updated by Gutter Shutter’s attorney. That same attorney will patent, trademark, or register for copyright company products and proprietary materials such as training tapes, etc., which further strengthens the chance of securing a favorable judgment in court should it come to that. And it has, Steinberg says, several times.

Basically a Warning

But having these agreements in place may well keep you out of court. Restrictive covenants are typically aimed at competitors who want to gain access to your company’s assets. Those assets include not only systems and information but the employees whom you have invested time in training to do a certain job and to do it in the way that your company requires it be done.

Just the fact that you have signed non-disclosure or non-solicitation agreements from your employees on file is often enough to deter competitors that want to help themselves to your people or systems. “With strong non-solicitation and confidentiality agreements,” Berenson says, “you essentially have a non-compete.”

Without those documents on file, however, the threat of legal action against a competitor would be hollow. And simply having the documents on file won’t assure a favorable court outcome. They need to be clearly written and clearly specify the assets that you claim are confidential and proprietary. And if you list everything—selling system, marketing materials, etc.—as confidential or proprietary, you’ve essentially watered down your agreement to the point of ineffectiveness. Your price sheet, for instance, is not confidential, since many people see it. Your formula for pricing a job, on the other hand, may be proprietary, that is, unique to your company.

Berenson points out that many agreements fail to specify a remedy in the event that a court holds that the agreement has been broken. So, for instance, if a salesperson left with a list of your past customers, called them all for a competitor, and subsequently sold them $100,000 worth of work by that competitor, you might be entitled to a percentage of that—but not if you fail to specify that as the remedy. Otherwise, a judge could rule that the agreement had been violated but have no idea of how to compensate.

You should also specify, he advises, that the defendant would be liable for whatever legal costs you incur for having had to pursue court action.

Guard your assets by getting clearly written agreements in place, making sure that employees sign them and understand what they’re signing, and letting competitors know you have them. This should be ongoing. “Market it, manage it, maintain it,” Berenson says. That way, should you find yourself facing a competitor in court, “you’re in good shape.” PR

About the Author

Add new comment

By submitting this form, you accept the Mollom privacy policy.
Overlay Init