The simple truth: Companies that have effective non-compete policies in place are worth more than those that don't.
I can’t tell you the number of times a new client has told me “I’ve heard that non-competes aren’t really enforceable.” This is simply not true.
Information vital to many companies includes trade secrets, proprietary data and client lists.
Non-competition agreements are still very much alive and enforceable in Missouri and Kansas, as well as a litany of other states, as long as the contract is properly drafted and the employer has protectable interests. Smart employers have become well-versed in these contracts, as they can be very effective in protecting
valuable client lists and trade secrets.
Three Main Restrictive Covenants. Although these contracts are commonly referred to as “non-competes,” and I will use that general term here, a good non-compete will typically contain three main terms that restrict the activity of employees after they leave. These restrictions include: (1) a restriction against general competition with the former employer, or a “non-compete,”
(2) a restriction against soliciting the former employer’s clients, as well as the former employer’s other employees, and (3) a confidentiality agreement, protecting the confidential information, including trade secrets, of the former employer. The non-compete and non-solicitation provisions will have geographic and time limitations, whereas the confidentiality agreement will not.
Non-Competes Must Protect “Legitimate Business Interests.” To be enforceable, the non-compete and non-solicitation provisions must protect “legitimate business interests,” such as a customer list. Companies typically expend significant resources in developing client relationships, and clients are the core of their business. In requiring its salespeople to sign a one-year non-compete, for example, the company is giving itself one year to go out and “save” the clients with whom the salesperson had contact, to ensure those clients stay with
the company. During this time period, the non-compete will prohibit the former salesperson from having any contact with these clients.
Another legitimate business interest is a trade secret. The secret formula for Coca-Cola is a good example of a trade secret. A trade secret is generally defined as information, kept secret, which is valuable because it has never fallen into the hands of a competitor. The Uniform Trade Secret Act (“UTSA”), adopted in some form by 47 states, including Missouri and Kansas, offers employers certain remedies against employees and others who steal valuable trade secrets, but a well-drafted non-compete agreement will offer even better protection.
You should also be aware, whether you are an employer or employee, of the federal Defend Trade Secrets Act (“DTSA”). Passed in 2016, it offers yet another layer of protection for employers. It does not displace the UTSA, but offers employers the option of suing in federal court rather than state court, if a misappropriation occurs. However, if your non-compete does not contain certain “magic language” informing the employee of certain rights, you will not be able to take full advantage of the DTSA.
Be Reasonable. Be wary of “form” non-competes. The law generally favors an employee’s freedom to move about from company to company, and only enforces non-competes if they are “narrowly tailored” to protect a company’s “legitimate business interests,” as identified above. If the restrictions in your non-compete are too broad or overreaching, the court may strike them down as unreasonable. A good non-compete will be reasonable, but will also contain specific language inviting critical courts to modify the non-compete and enforce the modified version, instead of declaring the entire contract is void.
Double Value. The obvious value for an employer in requiring certain employees to sign non-competes is to protect its client lists and to protect its trade secrets. If an employee goes to work for a competitor, solicits clients of a former employer, uses or discloses the trade secrets of a former employer, or otherwise breaches her restrictive covenants, the employer can potentially obtain a court order barring that employee from competing, and also force the employee to pay the company’s attorney fees.
The not-so-obvious point is that a business with non-competes is simply more valuable than a business without. If you are a business owner with key employees who have access to client lists and/or trade secrets, you should make sure they are “locked in” to a well-written non-compete agreement that is custom-drafted for your situation. Doing so will help maximize the value of your business should you ever be interested in selling or collateralizing your business.
A well-written non-compete agreement provides solid protection for a company’s client lists and trade secrets. Further, a strong policy of requiring key employees to sign non-competes can also provide useful leverage for the company during future sales negotiations
About the Author: Matt Clune is a partner with the Martin Pringle law firm in Kansas City.
P | 816.753.6006