Should You Require Your Employees to Sign a Non-Compete?

When your game-changing idea is shaking up established industries and attracting customers left and right, protecting that idea, is probably high on your list. So how do you prevent your trade secrets—and your database of clients—from falling into the wrong hands? Many companies rely on a non-compete agreement. Also known as a covenant not to compete, the document states that your employees will not start a competing business or work for a competitor for a specific period of time after they leave your company. While these agreements may seem like a good idea, they’ve been roundly lambasted for being unfair—and may even be prohibited in some states. To get the skinny on non-competes, Connecticut Innovations, which manages VentureClash, turned to Charles Krugel, a Chicago-based management-side labor and employment lawyer and HR counselor who has written, prosecuted, and defended non-compete agreements for his clients, who are based all over the world.

Connecticut Innovations: Thanks for speaking with us, Charles. First things first: Should startups require non-competes?

Charles Krugel: “The typical lawyer response—‘it depends’—is most appropriate for your question. It depends on each business’ unique circumstances, their needs, and their industry. Moreover, non-competes aren’t regulated on a national level; they’re regulated on a state level, and sometimes even a county or municipal basis. Consequently, the answer to this question is contingent upon a number of factors. Sometimes, these factors conflict with, or even contradict, one another.

“When I talk with a startup that believes it needs a non-compete agreement, my first question is usually to ask why it believes it needs this type of agreement. I go into great depth with them trying to understand their industry, including their competitors and regulatory environment. Additionally, I want to know what processes, products, services or information they’re trying to protect, why this requires protection and what they currently do, or are willing to do, in the future to protect this information.”

CI: If the business decides to require non-competes, what level of employee should it include?
CK: “Again, it depends on the business’ unique circumstances. Generally, non-competes are easier to enforce for top-level employees like officers, directors, and managers. Non-competes tend to be more difficult to enforce for lower-level employees like line staff or people who don’t have any managerial authority or fiduciary responsibility. However, if a business is in a highly regulated industry or one in which there’s an intense level of competition due to trademarked, copyrighted, or patented products or services, non-competes may be easier to enforce. Examples of highly regulated industries include energy, medicine, and financial services.”

CI: What should the agreement cover?
CK: “Generally, these agreements should specifically name which companies the employee cannot work for or otherwise do business with. These agreements should also have a specific time and territory restriction that tells the employee how long the restrictions will last once their employment has ended and for how many miles or in which specific countries, states, or municipalities those restrictions apply. Furthermore, the agreement should indicate the types of information that are restricted from use by that employee. Every agreement should provide a clause that tells the employee what to do or whom to contact if that employee has reason to believe that any of their activities might violate the agreement.”

CI: Are non-compete agreements enforceable?
CK: “Enforceability always depends on the circumstances encountered by the parties. More specifically, enforceability is a question of equity, jurisdiction, industry regulations, and standards, and the ability of each party to engage in commercial activities without unjust restrictions.”

CI: What are some common mistakes companies make when instituting non-competes?
CK: “Using boilerplate language from a canned agreement or from prior agreements is almost always a bad idea. Every agreement should reflect that employee’s and the company’s particular circumstances.

“Restrictions that are too broad in their scope [are another common mistake]. For example, if a company has only one location and it attempts to restrict the employee from working for any worldwide competitor for all time, [the agreement is] usually unenforceable without some compelling rationale.”

CI: Thank you for your time, Charles.
CK: “My pleasure.”