Business Insurance

Non-Disclosure/Non-Compete Agreements

By Todd Anderson, SPHR

What level of employee should be required to sign non-disclosure/non-compete agreements?

Even though any level of employee can be required to sign such an agreement, when it comes to enforcing one in court, that is a different matter. Only those employees who could truly affect the company’s success by unfairly sharing trade secrets, should be required to sign one.

For instance, your receptionist has probably not been exposed to company secrets, nor is he/she providing a unique function for your company that could damage your business if the individual were to leave. Requiring the receptionist to sign an agreement and then trying to enforce it would be next to impossible.

As a general rule, the higher up the corporate food chain the position, the easier it is to enforce a non-disclosure/non-compete agreement. Key employees should definitely be issued these agreements to prevent them from going to work for a competitor, recruiting employees, sharing trade secrets, or taking lists of customers or clients. ND/NC agreements can be a condition of continued employment and it is not uncommon for key employees to sign a new ND/NC every year.

How can I maximize the chance of having a non-compete agreement enforced by court?

Though there are a few states like California that do not enforce non-compete agreements (see exceptions below), most courts will enforce one if it is reasonable in terms of duration, scope, and geographic region.
The first issue to consider is whether or not there is a legitimate business need to have a non-compete agreement. Courts have viewed such things as protection of trade secrets; relationships with specific customers, patients, or clients; and ongoing goodwill associated with businesses, geographic location, or marketing/trade areas as providing legitimate business need for an agreement. Some courts have allowed non-compete agreements in cases where an individual received specialized training.

If there is legitimate business need, the reasonableness of the agreement will then come into consideration. Most courts view one year, no more than three (though one is more accepted), as fair if they are not too limiting as to where the individual can go to find employment.

The next element is geographic scope. Limiting the individual by saying you cannot work anywhere in the United States would not be enforceable. Though there is no set mile radius, areas as small as the town to as large as the whole state have been found to be enforceable.

Finally, a reasonable scope involves what specific work is not allowed to be done by the individual bound by a non-compete. Individuals going to work for a competitor without divulging trade secrets from a previous employer would probably not be considered reasonable scope.

The reasonableness in time, scope, and geographic location ultimately maximizes your chances of having the agreement enforced by courts.

Non-Compete agreements are illegal in California with two narrow exceptions. Non-Compete agreements are enforceable for partnerships and when someone is selling their ownership interest in a company. Companies in California can also prevent the “stealing” of trade secrets, customer lists, etc. (language typically found in a Non-Disclosure Agreement), they just cannot prevent fair competition.

The coverages discussed herein are for illustrative purposes only. The terms and conditions of your specific policy may differ from those described. Please consult the provisions of your policy for the terms, conditions, and exclusions that apply to your coverage.

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