BUSINESS INTEL
To Compete … Or Not To Compete A roadmap for understanding a complicated covenant. BY C HAR LI E ROS EB RO U G H
“Well, it’s a free economy.” That’s what people without technical know-how might say about covenants not to compete.
These clauses are aimed at preventing ex-employees from participating in the industry for a period of time following their employment.
Then again, those people may be the ones with a finger on the pulse as the national appetite for these types of covenants is fading. Some states, including Oklahoma, North Dakota and California, now have legislation limiting their enforcement, and President Biden’s administration has recently urged the Federal Trade Commission to ban or limit them.
A non-solicitation clause allows an employee to remain active in the industry but prevents him or her from soliciting employees, past customers, vendors or referral sources. It may look like this: During the term of your employment, and for a period of one (1) year immediately thereafter, you agree not to solicit or contact any employee or independent contractor of the Company on behalf of another business.
With all this added attention, corporate employers, especially those in the food industry, are left wondering: What is the future of covenants not to compete? First, it’s crucial to understand that this is an umbrella term. It refers to a set of contract clauses, executed between an employer and an employee, which limits the employee’s ability to work with a competitor after their current role ends. In detail, there are three common clauses that find their way into covenants not to compete: non-competition clauses, non-solicitation clauses and trade secrets/ confidentiality clauses. A non-competition clause prevents an employee from accepting a job with a competing company. The clause may look something like this: Employee expressly agrees and covenants not to compete directly or indirectly with Employer within a 500-mile radius of any of Employer’s marketing outlets either during the term of Employee’s employment or for a period of five years thereafter.
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Generally, employers use these provisions for employees in sales positions or executive-level employees with strong customer relationships. Provisions addressing trade secrets and confidential information are most common and frequently find their way into standard severance agreements. Here’s an example: Upon termination with the Company, all papers, documents, customer lists, and similar items containing Confidential and Proprietary Information, including copies thereof, shall be returned to the Company. These clauses protect employers from sensitive documents hopping from one company to another. In addition to contract provisions that prevent the disclosure of trade secrets, all states contain statutory protections forbidding employees from taking or divulging trade secrets to new employers. But are they enforceable?
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