As a business owner, you want to ensure that any trade secrets that are vital to your business, such as a proprietary piece of software or a client list, don’t fall into the hands of a competitor. If you have an employee who chooses to quit and use your trade secrets to establish a competing enterprise, you may quickly find your business in jeopardy. This is why drafting a non-compete agreement for all of your employees to sign can be such a crucial decision for your business.
Is this agreement going to be enforceable should an employee leave and, say, use his former company’s customer list to market a similar product or service? In Tennessee, the answer is both yes and no. A lot will depend on how focused and carefully worded the non-compete agreement is.
If you live in or around Murfreesboro or Berry Hill, Tennessee, and you are considering a non-compete agreement for your business, or you wish to have an existing one checked for potential enforceability, contact the business law attorneys at McCarter | East PLLC today for reliable legal counsel.
What Is a Non-Compete Agreement?
A non-compete agreement is a form of a contract that prevents an employee, during a certain period of time and in a defined geographic region, from leaving to become a competitor or leaving to work for a competitor.
For instance, company A markets a specific tool needed in the manufacturing of widgets. Company A requires all employees to sign a non-compete pact. An employee works there for nine months and gets an offer from an industry competitor, Company B, which sells a similar tool. The employee decides to leave Company A and take their customer list with them to use at Company B.
Alternately, the departing employee could take the design of the tool to a competing company, or set up a competing company entirely on their own.
These scenarios are exactly what a non-compete agreement aims to prevent.
What Are the Necessary Components
of a Non-Compete Agreement?
To survive a challenge in court, a non-compete agreement must be limited and “reasonable.” If the document is too broad or restrictive – for instance, it has no time limit or no geographic limitations – the courts will likely not look favorably on it.
To help ensure the enforceability of a non-compete, these elements must be present:
A date upon which the agreement commences. For example, upon signing it or upon the first day of work.
A reason for enacting the agreement. For example, to protect customer data, novel marketing techniques, proprietary tools or software, or more.
Specific dates during which the employee will be barred from working for a competitor. For example, 18 months after leaving the company (note: the longer the period, the more skeptical the courts may be).
A location covered by the agreement. For example, anywhere across the state of Tennessee or a combination of adjoining states as well (note: the larger the area, the more skeptical the courts may be.)
What counts as competition. For example, providing a list of competing companies, along with a clause preventing the employee from starting up their own competing company.
Compensation, or reward, for the person who signs the agreement.
If a non-compete is required upon starting the job, courts have held that the job itself is a sufficient reward for signing the document. If an employee has already been working for the company and is suddenly asked to sign a non-compete pact, the employer should provide some kind of incentive, such as a raise or promotion.
Enforceability in Tennessee Courts
Non-compete agreements are generally not favored by the courts in Tennessee, which view them as a “restraint of trade.” Unless the departing employee committed some kind of gross or obvious breach, non-compete or restrictive covenants are not always enforceable in Tennessee.
The courts will weigh the following factors when determining the enforceability of a non-compete agreement:
The consideration that is given for signing the non-compete agreement. For example, a new job, a raise, or a promotion.
Danger to the employer if no agreement exists. For example, lost sales, theft of proprietary data or processes, etc.
Economic hardship forced on the employee by the pact. For example, how long might the ex-employee be out of work because of the agreement?
The scope of the restrictions outlined in the non-compete agreement, including length, geography, and job description.
An otherwise enforceable non-compete agreement can still be voided if the employer is found to have breached the contract. If the employer fails to pay overtime, delays or skips commission checks, foregoes a promised bonus, or asks the employee to engage in illegal conduct such as fraud, the agreement can be ruled invalid.
Hire a Skilled Non-Compete Agreement
Attorney in Murfreesboro, Tennessee
It’s clear from the above discussion of requirements — and pitfalls — that crafting an enforceable non-compete agreement is far from a simple and straightforward process. Having the guidance and input of knowledgeable business law attorneys familiar with the drafting of non-compete agreements can make all the difference in your case. When you choose to work with the experienced non-compete agreement attorneys at McCarter | East PLLC, we believe you’ll increase your chances of successfully drafting a non-compete agreement that can survive any court challenges.