Clauses Can Cover Your Assets

Keeping employees from becoming competitors.

Like the leaders of many other technology companies, i3solutions Inc. CEO and co-founder Scot Johnson once thought the company had come up with an airtight legal document that would prevent any former employee from competing against the business. After all, a signature seals the deal, right?

Wrong. Over time, numerous conferences with lawyers specializing in technology labor contracts taught Johnson that the technology consultancys original noncompete agreement, created when the company was formed four years ago, contained the sort of vague and overly general language that makes a defense lawyers day in court a stroll in the park. Signatures or not, the thing was useless, they told him.

As luck would have it, i3solutions noncompete agreement had been put into tiptop shape by the time Johnson was compelled to put it into action this year against two former employees who had joined a direct competitor.

What many companies such as i3solutions—particularly young ones—dont realize when asking employees to sign noncompete agreements is just how tricky it is to compose one that will stick. For example, snags can arise from the fact that—with the exception of California, which does not enforce noncompete agreements —states have different ways of interpreting these agreements, said Gary Weiss, an attorney with Orrick, Herrington & Sutcliffe LLP, in Menlo Park, Calif. The most enforceable agreements, Weiss said, simply "ask for what [your business] needs and no more."

When businesses use broad, sweeping statements—such as not allowing a former employee to work in the same technology sector within a 500-mile radius of the company—they may think they are simply being thorough. Actually, Weiss said, they risk appearing as though theyre trying to tyrannize anybody who ever worked for them. As a result, such companies often receive less sympathy from judges.

First step? Dump the boilerplate agreements. Using a document from a kit or one downloaded off the Internet may save you money now, but it wont do much for your case in the long run, Weiss said. Instead, the agreement should contain language specific to your company. For example, he said, "Without using revealing details, put in your companys trade secrets, and explain how employees joining another company could affect trade secrets."

For i3solutions, former employees joining companies that target the same clients was its biggest threat. So in its new noncompete agreement, it chose to explicitly state what kind of company it considered a direct competitor.

The changes worked like a charm.

Trouble first arose after the company fired a manager earlier this year. Management was conducting a routine scan of the former employees computer hard drive and stumbled upon a copy of an employment offer letter from a competing consultancy, according to Michael Branson, the Sterling, Va., companys other co-founder and chief operating officer.

i3solutions co-founders were immediately alarmed, especially in light of the fact that an IT staff member had informed them that the former manager had entered into his database only two of the 32 potential sales contacts from a list she had given him before he was fired. Presumably, the precious contacts list was in the hands of a competitor.

After confirming that the former manager and an employee i3solutions had just laid off were working for this direct competitor, i3solutions lawyers sent a letter informing the competitor of the details listed in the noncompete agreements and stated that if both employees were not immediately dismissed, a lawsuit would ensue, Branson said. i3solutions never had to enter a court to get what it wanted.

Of course, the fairness of targeting the careers of former employees who had no choice but to leave, especially those laid off, is questionable. And i3solutions co-founders contend that it is not their intention to prevent former employees from working in the same industry. But, Branson said, "having former employees work for direct competitors—companies that seek out the same exact clients as yours for the same exact reasons—thats just too risky for your business."

Of course, its impossible to say now that i3solutions would have most certainly won its noncompete cases had it gone to court. But because it kept its terms reasonable, lawyers for the companys competitors likely realized that theyd be in for a tough fight in court. Said Weiss, "It doesnt matter to the actual laws whether or not the employee was fired or laid off. But judges are people, and it matters to them."