Customer accounts are the lifeblood of your business — and the most likely target for unscrupulous competitors, former employees or disgruntled former business partners. How can you protect these accounts and preserve the value of your business? One way is to use restrictive covenants in all employment agreements. Often, the mere presence of these covenants, whether or not they are enforceable, will dissuade would-be poachers from attacking your accounts.
The provisions appropriate for your top salesperson will differ from those for office personnel; however, every employee should be covered by restrictive covenants. Furthermore, all business contracts should include restrictive covenants — whether among the company’s ownership or between the company and its dealers or independent contractors.
Drafting restrictive covenants is not a do-it-yourself project. And one size does not fit all. Courts do not like restrictive covenants and often look for any reason to avoid them; in fact, some states, such as California, refuse to enforce such clauses. In those states where restrictive covenants are enforceable, the covenants must be narrowly drafted to protect a legitimate business interest, and they must also include specific components. Otherwise they may lack the protections you are seeking (and thought you had).
Potential Elements of Restrictive Covenants
Make sure to have these agreements drafted by an attorney who understands restrictive covenants. Your attorney can also help you decide whether some, or all, of the following provisions should be included in your agreements:
Non-compete clauses provide the highest level of protection but are the most difficult to enforce. Courts are reluctant to restrict a former employee’s ability to find work to support his family — even if it’s with your competitor. Enforcement often depends on specific facts. A court probably won’t enforce a non-compete against a technician — you likely have no legitimate business interest in restricting his employment — but may enforce a non-compete against an employee who solicits business from your customers. You do have a legitimate business interest in protecting your customer relationships.
The duration and geographic scope of a non-compete clause must narrowly tailored as well. You cannot stop a former employee from competing in geographic areas where you are not operating, for example. Additionally, the time period covered by a non-compete must also be reasonable. Generally the shorter the duration, the more likely the clause will be enforced.
Non-solicitation clauses directly prohibit parties from soliciting your existing customers. Courts are more likely to enforce these provisions than non-compete clauses because they specifically protect your ongoing customer relationships. Enforcement of non-solicitation clauses often depends on who solicited whom: did the former employee solicit the customer or did the customer approach the employee?
Non-acceptance clauses prohibit former employees from accepting business from your customers and are more difficult to enforce than non-solicitation clauses because they restrict the customer’s right to choose a service provider. Well-drafted restrictive covenants not only include prohibitions against soliciting or accepting business from existing clients but also from your business prospects as well.
Non-disparagement clauses prohibit employees from speaking critically of their former employer and offer more specific protection than defamation laws.
Non-disclosure agreements prohibit the disclosure of trade secrets including confidential customer lists. But keeping information confidential can be tricky — the information must not only be secret and provide a competitive advantage, but you also must take reasonable steps to protect it from disclosure — even within your office.
Litigation
Even if you do not have enforceable restrictive covenants, you still may be able to protect your accounts or confidential business information. Most state laws and some federal laws provide protection for “unfair competition.” A written contract with customers who were inappropriately solicited may support a claim of tortious interference with contractual relations. Even if you do not have a written contract with a customer, you may still have claims.
Litigation to enforce restrictive covenants or seeking protection under the laws of unfair competition may be more costly than other lawsuits because you must generally seek an immediate injunction to stop former employees and their new employers from soliciting your accounts or using your trade secrets. Injunctions are extraordinary measures, and lawsuits seeking them must be filed immediately and are generally prosecuted on a fast track. Hearings are scheduled, depositions need to be taken, court papers filed, and documents exchanged and reviewed — all within a very short period of time. It is like cramming a year’s worth of litigation into a few weeks.
Litigation is an expensive and inefficient way to protect your accounts. The question is: can you afford to ignore unfair competition?
Eric Pritchard co-chairs the electronic security group of Kleinbard Bell & Brecker LLP. Pritchard focuses his practice on the electronic security industry with an emphasis on acquisitions. This column does not constitute legal advice; contact an attorney with specific questions.
