If you’re reading this article, my working assumption is that at some point in your life you’ve been employed by somebody other than yourself. Odds are you’re working for somebody else at this very moment, perhaps even plotting the day you jump ship and join a competitor or set out on your own.
Or perhaps you’re on the other side of the credenza and want to protect your firm from employees that defect with more than their fern and their framed family picture in their take-home banker’s box on their last day. The point is that both employee and employer should understand a few key covenants that are typically signed as part of an employment contract.
The latitude afforded to non-competition agreements is a matter of state law, which means that the restrictions that can be imposed on departing employees varies widely depending on the state of employment. California infamously detests non-competes, for example, and generally renders them unenforceable unless they arise as part of the sale or dissolution of a business. These are specific statutory exceptions to the general rule.
The logic is that non-competes restrict an individual’s ability to make a living and restricts healthy competition.
Other states are more permissive with respect to non-competes, and recognize that employers have a legitimate interest in protecting their confidential information, trade secrets, intellectual property, etc. from competition. Even still, non-competes must impose only reasonable restrictions in terms of scope, duration and market, and must generally restrict departing employees only to the extent necessary to protect legitimate employer interests.
A non-compete that unduly restricts trade or livelihood likely wouldn’t be enforceable anywhere.
Carefully review non-compete covenants to understand the restrictions imposed, how long they are imposed for and in what geographic region. Enforceability is fact- and state-specific, but the permissible duration of a restriction may reasonably be longer for more senior-level employees or those in possession of highly sensitive employer information. Anything more than two to three years will be scrutinized more closely (unless you’re employed in California or any other similar state, which renders almost all non-compete restrictions unenforceable).
Non-solicitation agreements are intended to restrict a departing employee from soliciting the employer’s clients and/or other employees, and like non-competes are largely determined by state law. Also like non-competes, non-solicits must be reasonable in scope and duration if they are to be enforced. Again, California stands out for its skepticism of non-solicits and views them as anti-competitive.
There are a few more levers to pull in a non-solicit. For example, query whether your non-solicit applies only to current clients or whether it also encompasses prospects. Maybe it doesn’t apply to your separate book of business, maybe it does. Or perhaps only certain communications may be sent to a subset of clients within a definite timeframe by a limited number of mediums using only specified contact information.
Determining if and how former clients or co-workers can be asked to follow you to another firm can make a huge difference when drawing up the financial model and business plan post-breakaway.
Confidentiality / Trade Secrets