The Least Restrictive Means Possible

A recent study in The Economist notes that intangible assets make up 75 percent or more of the value of publicly traded companies. That number is likely higher for many small businesses, which often have very few assets other than their ideas, strategies, and relationships.

That news should both invigorate and scare you. On the one hand, it means that businesses with great ideas can thrive and prosper, no matter what their size.

On the other hand, it means your business is at risk if you do not safeguard your intangible assets.

Successful businesses use various strategies to preserve and protect their intangible assets. Most business owners have at least some familiarity with patents, trademarks, and copyrights. These strategies protect your intangible assets from outsiders.

The greatest risk to your intangible assets does not come from outsiders, however, but from your employees, both current and former. If you want to protect your intangible assets, you must use strategies that protect your intangible assets from insiders.

Three key strategies lie at the intersection of employment law and intellectual property law. Each of them provides a valuable method for protecting your intangible assets, particularly when used in combination with the other strategies.

  • Non-compete agreements prohibit employees from competing for a limited time in a specific geographic area and from exploiting customer relationships gained during their employment.
  • Confidentiality agreements restrict employees from disclosing or using confidential or proprietary information after their departure.
  • Trade secrets allow companies to protect information that is not commonly known in the industry, as long as they take reasonable steps to secure the information.

From time to time, we’ll talk about how to implement the three different strategies. Today we’ll focus on non-compete agreements.

The law of non-compete agreements varies widely from state to state. Most states will enforce some types of non-compete agreement to one extent or another, with California and Georgia as the two states that are most hostile to the agreements.

The states that allow non-compete agreements use the same terminology in discussing whether an agreement is enforceable. As a general rule, the courts require the employer to show that he has a protectable business interest and that the agreement is reasonable as to the time and geographic scope of coverage.

Determining whether a restriction is “reasonable” depends greatly on the nature of the business, the scope of the employee’s influence, and the circumstances under which the employer obtained the agreement. The employer must point to specific reasons why the restriction is necessary to prevent unfair competition. American courts favor free enterprise and fair competition; the employer must show why the agreement prevents unfair competition and does not merely seek to prevent competition per se.

As a general rule, the narrower the restriction, the more likely a court will enforce that restriction. Before you prepare a non-compete agreement, ask yourself the following questions:

  • What specifically am I trying to protect?
  • Why would it be unfair for the employee to compete in the protected area?
  • Do I really need this restriction? Why?
  • What is the smallest restriction that adequately protects the employer’s business interests?

Be sure to seek the advice of experienced legal counsel in preparing your non-compete agreements. The only thing worse than not having a non-compete agreement is having an agreement that is unenforceable.

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