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Why Companies Should Have Employees Sign Non-Compete Agreements

On Behalf of | Jul 25, 2015 | Firm News

Non-compete agreements are an important matter that every company should take seriously. In fact, Nike recently settled a lawsuit against formers designers who ‘defected’ to Adidas to help them open up a design center in New York. Non-compete agreements are critical to protecting the company and its future profits.

What are the Legal Requirements for a Non-Compete Agreement?
Every non-compete agreement must satisfy three basic requirements. First, it must protect a genuine business interest. For example, this could be trade secrets or an established clientele base. Second, it must offer the employee something of value in exchange for signing the agreement. For example, this could include a raise, promotion or even the job itself. Third, non-compete agreements must be reasonable. This means the duration and geographic area must be limited.

What are the Financial Benefits of Non-Compete Agreements?
The most highly recognized benefit of a non-compete agreement is trade secret protection. Since information is power, any employees that discloses confidential information threatens the financial health of the company. Non-compete agreements also protect the investment that has been made in recruiting, training and retaining top employees. Finally, having a non-compete agreement will reduce potential lawsuit costs if an employee does break the contract.

What are the Customer Benefits of Non-Compete Agreements?
Non-compete agreements will also protect your customer relationships. This is because sometimes when an employee leaves, their clients may faithfully follow. Therefore, non-compete agreements will increase the client confidence and retention. Non-compete agreements also help to clarify the professional expectations for employees, which will improve their behavior with clients.

What Happens if the Employee Breaks the Non-Compete Agreement?
A court ordered injunction is the most common result of an employee breaking a non-compete agreement. This means that instead of seeking monetary damages, the employer simply asks the court to enforce the non-compete agreement by making the employee leave their new employer. However, seeking compensatory damages due to loss of profits is also an alternative.

Is Non-Compete Agreement Violation a Serious Problem?
One recent report by Fair Competition Law reveals the increasing number of non-compete agreement violations. There were about 1000 non-compete and trade secret decisions issued by U.S. courts in the year 2000. Every year the number has increased until 2013, when there were almost 3000. Non-compete agreement violations are a growing problem.

In conclusion, non-compete agreements provide legal, financial and customer base protection to businesses.  For assistance with your non-compete forms, contact Goldman & Ehrlich.