How effective are your company’s non-compete clauses?

Lately there has been an influx of queries from both sides at our firm about non-compete clauses which have been glorified due to their promise of protecting large multinational companies against competition from ex-employees who would know valuable trade-secrets or against current employees considering the greener grass fields shown by a rival company hoping the gain valuable information about your business.

During my practice, I have seen large stacks of corporate paperwork, often making little sense in court later on, when there is an alleged breach of the so called ‘non-compete agreement’. For example, in one particular arbitration I had to give my legal input in this year, it was pinpointed that the clause or agreement was not supported by any consideration. For example, why should an employee being paid peanuts for years, sign a non-compete contract as a part of HR practice 2 years later and be bound by it when he resigns or is dismissed from his job? This is especially so when the time of signing of contracts does not match. The solution to this is to either make the non-compete clause a part of the original contract, or if you go over an HR initiated campaign of signing additional documents with simple non-compete clauses, instead of wholly updated employment contracts, then perhaps offering a type of bonus or benefit to the employees signing the contract can be very beneficial. The essential legal test in this regard would be, whether a material benefit was offered in exchange for signing a non-compete.

The clause will also fail for validity in court unless it depicts the protection of your legitimate and critical business interests or proprietary trade secrets. Most of the cases where we are engaged to mediate or resolve the matter through legal action include medical practices, schools, tuition centers and even Beauty Salons, where the workers or specialists seem to walk out with their fan following of clients, patients or students. Honesty I consider it a duty of the establishment whether it is a medical practice, an educational center or even a beauty salon to have enough credibility to retain clients. However in such a case where we are trying to impose the anti-compete clauses we will be looking at something more sinister, in the form of a plan to actively solicit away clients or patients or students, something that results in financial harm to the establishment employing the person.

This brings us again to the issue of realistic and reasonable demands upon which a ‘non-compete’ clause can be based with out placing a burden on the employee’s ability to earn a living in the same sector of expertise. However if the court is quick to find you as a person or organization who/which revels in preventing honest competition, you may not be able to prove that you have a legitimate business interest.

Problems also arise when we look at such agreements from the point of view of scope, duration and geography. The last factor is still a bone of contention when online internet based or software based jobs are concerned. With respect to geography, there will be a clear need to ensure that no such areas are included which do not affect your business. Again in the case of Software developers whether there are no geographical boundaries for employers like Google and Yahoo, this can be a problem to enforce.

Our final advice to you is that unless you are absolutely unable to afford credible legal advice or are running out of time, standard Non-Compete Agreements or their templates are best not used or signed, for the simple reason that the nature of each business and its actual commercial reach and resulting business interests are different in every respect. A well-drafted Non-Compete agreement can make all the difference in establishing you as the next Microsoft or Apply or Google of the future era!

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