….non-compete agreements…an employer perspective..part I

(Over the next few weeks, we’re going to discuss non-compete agreements from a hiring authority perspective as they relate to the interviewing and hiring process).

So, you think you’ve got a non-compete agreement with all of your employees and no one would dare leave your organization and compete with you by calling on your customers or taking your “trade secrets.” Babich & Associates, as a recruiting firm, gets asked about this issue at least two times a week. We are not attorneys (… that’s why we’re asking Russ Brown to help us with this issue), but we are asked by, not only candidates, but also our clients about non-competes. It’s pretty clear by the frequency of this question that non-compete issues are important ones in the hiring and employment process. It is also clear that most hiring authorities think they know about non-compete agreements. Most don’t!

It’s Russ’ job to advise you about specific details of enforceable non-compete agreements with employees. He can be reached at 214-613-3350 or russ@brownfoxlaw.com. We are often asked, however, about a candidate’s non-compete agreement by our clients as well as candidates asking us about their non-compete in seeking a new job. Our discussion is going to center around the issues we see in the interviewing and hiring process regarding non-competes and ask for Russ’ comment and opinion about these issues. Russ can discuss non-compete specifics for the standard fee of $300 per hour. (Trust me, he is worth every penny of it!)

A non-compete agreement typically restrains employees from engaging in a competing business with his or her former employer, in a certain geographical area, and for a limited period of time following the termination of the employment relationship.

Here are some of the major issues we hear from our clients about non-competes during the interviewing and hiring process:

Can your candidate bring us customers? This question is usually asked of sales candidates, customer service or customer facing candidates. Our clients would like a candidate to be able to bring his or her contacts who they are presently calling on to their new employer. It’s usually followed by the comment, “Don’t worry if they have a non-compete… they don’t mean anything in Texas.” Ironically, many hiring authorities will claim they have a non-compete also.

Any candidate with any brains would know that if the new hiring authority was asking them to “steal for them” then somewhere along the line, the employee’s new company would just as easily “steal from them.”

The rationale behind this thinking on the part of a prospective employer is, “Well, everybody knows everybody’s customers. We all have the same customers, so they’re not really any trade secrets.” Don’t fall into this trap. A company’s password protected, customer database is probably going to be construed as a “trade secret.”

Asking a candidate to bring a printed customer database from his present or previous employer once he or she is hired is equally insane. It is not the candidate’s property.

Russ’ comment:

“Anytime an employee seeks to introduce her customer “Rolodex” from a prior employer to a new employer, there will be an opportunity for legal fireworks. Protection of this sensitive information is a huge issue for companies. Generally speaking, never ask a candidate to use a prior employer’s confidential information. Instead, I recommend to my corporate clients to be proactive and first obtain assurances from a candidate that she is not working under any form of restrictive covenants (e.g., restrictions like a non-compete), or if she is, precisely determine the limitations on future employment. The new employer should obtain this assurance in writing either in the form of a non-disclosure agreement or various protective clauses in her new employment agreement. These assurances should greatly help to protect the company from unknowingly using a prior employer’s client lists and trade secrets and remind the new employee that the company will expect her to protect its confidential information in the future. Key clauses include written assurances from the candidate that (a) she is not under any prior restrictive covenants and/or will honor prior restrictive covenants, (b) she will not improperly use any third-party’s (e.g., your company’s client) trade secrets or confidential information, and most importantly, (c) she will not use your trade secrets and confidential information beyond the ordinary course and scope of her employment with you.

Beyond client lists, the new employer should ensure it does not use any other trade secrets supplied by the new employee. Some examples:

Budgets, business plans, cost and price information, blueprints, analytical data, advertising terms/conditions, forecasts, formulas, profit/loss statements, proprietary technology, marketing/sales promotion information, vendor/supply lists, visitor tracking data, etc.

An employer who takes these issues seriously on the front end will be much better equipped to defend against claims by the former employer in the future.”

Well, the candidate had those people as customers before he went to his present employer… right? That may be true, but his or her present employer will not see it that way. Their attitude will be, “Once a customer is in our database… he is our customer.” And since that customer is a “legitimate business interest,” they can’t be taken from us. Often, we have candidates who, when they went to work for their present employer, excluded from their non-compete agreement customers they already had. Expect that a candidate might do the same with you.

Russ’ comment:

“ The ‘ownership’ or origination of customers can be a fact intensive issue in which the lawyers duke it out through written discovery, depositions, emergency temporary restraining order hearings, injunction hearings, and trial, if necessary. As we previously suggested, it’s wise to establish a clear understanding on the front end and at the outset of employment and do so in writing and seek legal advice regarding how to handle next steps.”

Have the candidate bring a copy of their present non-compete agreement with them during the interview process. Now, we’re getting somewhere. This is a great idea. Many non-compete agreements are written in other states. Some of the ones we’ve seen over the years would be terribly difficult to enforce (i.e. the defined geographical area is “the world”). Don’t take the candidate’s opinion of how enforceable or valid his or her non-compete agreement is. Their attitude towards their present non-compete will be the same attitude they will have toward yours. Regardless of their attitude, you be the judge of the candidate’s non-compete agreement and how it could impact your business should you hire the candidate.

We’ve had some clients over the years who have agreed to take on the legal fees associated with defending a candidate’s non-compete if the candidate was sued by their previous employer. Something like that is a business decision and may be worth it. Most of us have enough headaches and don’t need a “self-inflicted” one like this, but it might be worth considering.

Beware of a candidate who says he or she does not have a non-compete agreement or can’t find the one they signed when they were employed by their present company. Some candidates… amazing number of even very professional ones… truly don’t know if they have a non-compete agreement or not. Both situations should be big red flags.

Russ’ comment:

“Tony, you’re exactly right about new candidates’ confusion regarding prior agreements.” At the time of hire, employees typically are excited and taking in a lot of information. It’s not uncommon for an employee to sign basic “new hire” documents with little or no review. I’ve encountered instances where written non-competition agreements are in place, but the employees do not recall signing an employment agreement, non-disclosure agreement, or non-compete agreement.

I also would never advise a client to trust a new employee’s assurances regarding a prior agreement. If possible, a wise employer will, at a minimum, review the agreement in-house. The best option is for the employer’s counsel to review the prior agreement.

It is important to note that there is a vast difference between various states’ approaches to restrictive covenants. In Texas, where I practice, properly drafted, reasonable restrictive covenants, including non-compete agreements, are enforceable and employers serious about protecting their workforce and trade secrets will aggressively seek enforcement.”

Legal Disclaimer:
*No commentary by Russ Brown in this article is to be construed as legal advice or creating an attorney-client relationship. If you have specific questions, contact an experienced employment attorney to discuss your legal issues.

About Russ Brown:

*Russ Brown is a Dallas-based employment attorney and the Managing Partner of Brown Fox Kizzia & Johnson PLLC. Russ has been honored as one of the Best Lawyers in Dallas under 40 years old by D Magazine and as a Rising Star by Texas Monthly and Super Lawyers seven times. Learn more about Russ Alland Brown Fox by visiting www.brownfoxlaw.com.

Topics for the next few weeks: honoring the non-compete and still being competitive, lawsuits over the non-compete, history of the candidate’s present employer regarding non-compete agreements, and postemployment agreements with previous employer.

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