Noncompete Or Not?

Did you sign on the dotted line when you were hired? Do you make all your employees sign their lives away too? Once reserved for product development and engineering areas, more and more IT managers are using noncompete and nondisclosure agreements throughout their departments to avoid losing key employees to the competition and to protect against theft of source code or other intellectual property.

Emily Geneva Finan is a technology project leader with Bounty Systems Inc., a privately held start-up that develops marketing referral and campaign management software in New York City. Like many other IT managers, Finan requires her new employees to sign a noncompete agreement (NCA). Under the terms, new hires can’t work for the competition and are barred from working on other referral programs or campaign management software for two years after they leave the company.

Finan sees the policy as good business practice. “[NCAs] show we are a serious company that has taken an interest in protecting our corporate assets. It is also a question that investors ask when they are deciding to invest in the company. They see it as protection, that their investment in our company can’t be lost simply because a key employee walks away and decides to set up a competing business,” Finan says.

There can be backlash against NCAs however, especially when the competition for skilled IT talent is high. Jeff Braswell is vice-president of network operations at e-Media LLC, a streaming media solutions provider in Stamford, Conn. When the firm launched two years ago, all executives and IT staff were required to sign a NCA as a condition of employment. Despite the desire to protect its proprietary streaming media technology, the company quickly abandoned noncompetes when it became clear that new talent was put off by the policy.

“At that time, it was an employee’s [job] market. The opportunity to change jobs for a substantial increase in salary, or at that time, equity stake, was too great to get locked into an agreement that kept them tied to a single company in the area. It didn’t take long for us to realize [NCAs] were not being received well by people we were trying to attract, so we stopped using them,” Braswell says.

Anytime you have staff with access to trade secrets – product codes, customer files or other confidential data that gives your business an edge and that you wish to keep secret – it’s worth considering a noncompete or nondisclosure agreement, advises Bill Ejzak, an attorney with the Chicago law firm of Schuyler, Roche & Zwirner, which specializes in trade secret protection.

But if you plan on enforcing the NCA in court, boilerplate documents are a big no-no. Courts typically toss these one-size-fits-all agreements out because they are too vague. Judges evaluate noncompetes on the criteria of reasonableness, the scope of activities prohibited, duration of the agreement and geographic territory limitations. The most enforceable NCAs define specific tasks for an employee, and spell out exactly what they are prohibited from doing in the future.

“You can’t just tie people up with a NCA. There has to be a legitimate business interest. If you have someone writing source code for you, have a restriction there, but don’t restrict them regarding marketing activities or other areas outside of their typical area of work. You can’t prevent someone from working as a programmer or drafter of source code everywhere, but you can probably prevent that employee from developing the same type of code they’re working on for you. The trick is to protect your trade secrets without hobbling the person’s future employability,” Ejzak says.

Another potential stumbling block is the difference in NCA enforcement from state to state. States such as California and Georgia make it difficult for employers to enforce NCAs as written, while Minnesota historically comes down on the side of businesses in disputes. “Pay attention to where you do business, what areas you want to protect, and work with experienced legal counsel who can tell you what has been enforced in the past,” Ejzak says.

Tom Thrower, general manager of Management Recruiters International of Oakland, Calif., offers this advice, “Companies really need to look at who they want to enforce [an NCA] with. With your high-end people, directors of engineering, designers and other IT people who may hold the keys to specific sensitive info, you should take steps to ensure you are protected. But remember, if you are trying to legislate too much morality, you put yourself in a situation where no one obeys the law.”

Braswell adds, “Make sure the noncompete agreement makes sense for your scenario. When you’re dealing with [research and development] or proprietary technology, it’s something worth protecting. In the end you need to consider the market you’re in and the kind of technology you’re trying to protect, and weigh that against your need to attract quality talent.”

Bonny Georgia is a freelance writer in Hudson, Mass. She can be reached