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How do Noncompete Agreements work?

A Noncompete Agreement is a contract between employer and employee where the employee agrees not to work for a competitor during their employment and after the employment terminates for a period of time. The employer typically includes these agreements, or noncompete clauses, in the employee's initial Employment Contract.

By limiting the employee's ability to work for a competitor, an employer protects its intellectual property, confidential information, and trade secrets from being shared with a competitor when an employee changes jobs or moonlights.

Many states, however, limit Noncompete Agreements, often making them difficult to enforce, especially after an employee separates. In addition, since laws vary from state to state, it can be informative to talk to a lawyer about your other options.

Why do some states limit Noncompete Agreements?

Many states either ban or limit Noncompete Agreements between employers and employees. For example, California, Oklahoma, and the District of Columbia ban Noncompete Agreements altogether, whereas Washington, Nevada, and Illinois ban Noncompete Agreements for low-wage workers. Other states, such as Texas, Michigan, and Florida, permit Noncompete Agreements as long as they are not too restrictive.

The restrictions vary from state to state, but state legislators have explained that these agreements:

  • Can prevent employees from seeking a new, better-paying job.
  • Can be abused by employers by being overly restrictive as to time or geographic area.
  • Can hurt low-wage or hourly workers.
  • Can limit independent contractors from getting other clients.
  • Can make it more difficult for employers to recruit workers.
  • Can reduce worker wages.

The federal government is following the state trend of limiting or banning Noncompete Agreements. On July 9, 2021, President Biden signed an Executive Order on Promoting Competition in the American Economy, encouraging the Federal Trade Commission (FTC) to "curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility." By curtailing or banning Noncompete Agreements, the President hopes to promote economic growth and competition by making it easier for employees to change jobs without limits.

What alternatives do employers have to protect trade secrets?

Even with the trend against Noncompete Agreement use, employers have options to protect their trade secrets and intellectual property. Some alternative options include:

Employee Non-Disclosure or Confidentiality Agreements

Non-Disclosure Agreements (NDAs) are contracts between employees and employers, requiring employees to not disclose certain sensitive information to anyone outside the organization both during and after employment. If the NDA is violated, the employer can take legal action against the employee or former employee, and potentially their new employer.

A Confidentiality Agreement is similar to an NDA. Like an NDA, Confidentiality Agreements protect an organization's intellectual property and secrets by creating clear legal consequences if the employee or signer reveals confidential information to anyone outside of the company.

When employees leave the organization, employers may want to conduct an exit interview, or provide some documentation, to review the terms of an NDA or Confidentiality Agreement that remain effective after separation.

Non-Solicitation Clauses

To protect trade secrets and other confidential information, employers can also use non-solicitation clauses which prohibit an employee from taking customers, clients, vendors, or other employees with them after separating. This way, former employees cannot recruit your talent or customers for a new business or another employer.

Can a Non-Disclosure Agreement protect my business?

To understand how NDAs can protect your business, it helps to understand what happens without a Non-Disclosure Agreement in place. Without an NDA, if an employee discloses your confidential information during or after their employment, your legal options are limited to state and federal protections that may or may not apply. Many of these state and federal protections may depend on whether you have patent or other intellectual property protections in place.

With an NDA, employers and employees agree to the rules and consequences that apply. An NDA can provide employees a better understanding of the potentially serious legal consequences for their disclosure of any protected information, such as client lists or a secret recipe. When employees know that they can be held liable for any disclosures not permitted by the NDA, it becomes less likely that they may disclose the information.

If an employee breaches an NDA, they may be subject to potentially severe financial penalties, including paying monetary damages to the former employer and potentially paying for the employer's legal fees. If the employee discloses trade secrets, the employee may be subject to additional penalties under the Uniform Trade Secrets Act (if adopted by your state) or even criminal penalties under the Economic Espionage Act of 1996, including imprisonment of up to ten years. These agreements may also be helpful to stop other businesses from using your confidential information when hiring your former employees.

Protecting your organization's trade secrets, confidential information, and intellectual property, can be a complex and daunting process. If you have more questions about Noncompete Agreements, or other ways to protect your business's sensitive information from disclosure, reach out to a Rocket Lawyer network attorney for affordable legal advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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