Noncompete Agreements

Pros and Cons

By Larry Berglas

Contracts restricting former employees' ability to use information gained at your company may prevent them from setting up competing businesses later.

What happens when a valued employee leaves the job only to set up shop in competition with the former employer? In the intensely competitive business environment of today's marketplace, business owners have an interest in protecting their turf. One might attempt to prevent this sort of competition contractually, through the use of what are commonly known as noncompete agreements. But how valid are they?

Businesses that utilize trade secrets and confidential information or a business professional such as a chiropractor with a local following, to name just two examples, may have an interest in restricting a former employee's ability to compete with them.

Restrictive Covenants

Noncompete agreements are known for what they contain--restrictive covenants. Because restrictive covenants can be tailored narrowly or broadly, it is how they are drafted that matters. If contested in court, it is the scope of the restriction that will be scrutinized. Broadly worded noncompete agreements may be viewed by some courts as too restrictive, giving former employees little leeway when it comes to using reasonable amounts of general knowledge gained on the job in future positions with other employers. Courts also may frown on wording they see as vague, which could provide employees too little guidance as to what limitations are being placed upon them.

While the agreements themselves can be problematic from a legal standpoint depending upon their scope, they give an employer another arrow in its legal quiver to discourage former employees from competing against it. Employees likely will think twice about going into direct competition with their former employers. After all, who wants to be sued?

Think Before Signing

So, why would anyone sign a noncompete agreement? When a good job offer presents itself, sometimes the immediate future goes out the window. Years down the road, it is hard to believe that a dispute could arise because one will leave the business and go head-to-head with the competition--the former employer. It happens, though, and some live to regret entering into such agreements made in haste. Before signing a noncompete agreement, due consideration should be given to the precise meaning of the restrictions and their legal as well as practical implications.

The New York case of DoubleClick v. Henderson illustrates some of the pitfalls of attempting to compete with one's employer where trade secrets and confidential information are concerned. DoubleClick, which sells advertising on the Internet, sued two of its former key employees, David Henderson Jr. and Jeffrey A. Dickey, after both decided to launch a competing business.

Both Henderson and Dickey had entered into confidentiality agreements upon employment with the advertising firm of Bozell, Jacobs, Kenyon & Eckhardt Inc., which later merged with DoubleClick. Dickey also entered into an agreement that restricted him from competing with his former employer, Bozell-later DoubleClick, for one year after leaving his job there.

As important employees in the organization, Henderson and Dickey had access to certain allegedly confidential information. DoubleClick found out about their plans to compete and sought a preliminary injunction to bar them from engaging in business activities in competition with DoubleClick.

Trade Secrets at Issue

The court concluded that DoubleClick's confidential information about its pricing and customers amounted to trade secrets that Henderson and Dickey would "inevitably use." The court reasoned further that Henderson and Dickey owed DoubleClick, as their employer, a duty not to divulge confidential information.

The court noted, however, that employees "may secretly incorporate a competitive business prior to [their] departure." But they must not use the employer's "time, facilities or proprietary secrets, to build the competing business."

As a result, the court said, it wasn't necessary to determine the viability of the confidentiality agreements and Dickey's covenant not to compete. The court said that even without such an agreement a former employee is barred from soliciting customers to a competing venture through the use of fraud, trade secrets or confidential information.

In the end, the court was unwilling to enforce the one-year non-competition period, viewing it as inequitable. Instead, the court issued an order preventing Dickey from competing for six months, but permitted DoubleClick to seek an extension, if warranted. The court reasoned that whatever knowledge Dickey gathered about DoubleClick's operations would "likely lose value" within six months "[g]iven the speed with which the Internet advertising industry apparently changes."

Ultimately, and as the court apparently saw it in DoubleClick, it is contrary to the spirit of free trade to overly restrict one's employees. Subject to some of the concerns mentioned above, individuals must be permitted to work in their chosen field of endeavor. Because the consequences of entering into restrictive covenants can be severe, all the parties to the agreement need to understand what is really at stake so that unnecessary disputes do not arise later.

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