What You Need to Know About Non-Competition Agreements

The Non-Compete Agreement  – What it protects, why, when and how

by Jim Borchers

Ever hear this? “Non-compete agreements are not worth anything.” It astounds me how many people believe this. Just the opposite is true. Repeat, the opposite is true. Non-compete agreements are commonly used in the sale of a business (i.e. the seller/owner agrees not to compete after the sale) and for employees and independent contractors.

Buying or Selling A Business  

Non-compete agreements are a routine part of any business sale. If your business is a corporation or an LLC, then you, as the key employee and owner/shareholder, will be expected to sign a non-compete agreement. If you are the buyer, you have every right to expect a strict non-compete from your seller’s shareholder/owner(s); and in larger transactions the seller’s key employees may be required to sign one as well.

In a business sale, the non-compete must be separately purchased, i.e. the person who agrees not to compete must be paid directly for that commitment. Therefore, if you are a buyer, be certain that a separate check goes to each person who signs a non-compete. If you purchase from an entity (i.e a corporation or LLC) remember that the shareholder/owner/employee who agrees not to compete is not the seller. Therefore, you need a separate non-compete agreement with each of those people individually even if your purchase contract is with a sole shareholder/owner.

As the seller, you may think, “I’ve heard these non-compete agreements aren’t worth anything, so I’ll just sign it to go along.”  You discover a year later that your buyer didn’t keep all of your employees (as he promised), and he’s started selling inferior products or services. A couple of customers call and say, “It’s not the same. We need you back.” You can’t stand “your” business being run that way. You never treated your customers like this. You need to get back into the market to put “honesty” back into the industry. That non-compete agreement shouldn’t keep you on the sidelines while your old customers are being cheated right? .... WRONG. Courts have absolutely no sympathy for former owners who have a change of heart. Non-compete agreements are enforceable.    

Non-competes for Employees and Independent Contractors

If you have a key employee, where do you think he/she will go after leaving? That’s right, your biggest competitor and your customers. You have every right to protect your customers with a non-compete agreement designed to give you a legitimate unfettered right to keep a good relationship with your customers before a former employee tries to “steal” them.

In a business sale, the non-compete must be separately purchased, i.e. the person who agrees not to compete must be paid directly for that commitment. But for employees (or independent contractors) no such “purchase” is necessary. In Missouri an employer may say, “Sign this non-compete agreement or you are fired,” and contrary to what many think, these agreements are valid and enforceable. Even so, it’s best practice to require the signing when an employee is hired or in conjunction with a performance review, and emphasize that hiring or a raise/bonus is part of the consideration for the non-compete.

 But you say, “It’s illegal to prevent someone from getting a job.” Yes, but getting a job where? A non-compete agreement that is reasonable in time and distance is enforceable. So, what’s “reasonable” you ask? It depends on the employer’s geographic customer base. Let’s say that you sell shoes in St. Charles, Jefferson and St. Louis counties. Could you enforce a non-compete in those counties for the sale of shoes, i.e. prevent your former salesman from being employed as a shoe salesman in those counties? Yes, absolutely. Does it prevent your former salesmen from getting a shoe sales job outside of those three counties ... no.  Protecting your customer base in those counties is not preventing your former employee from gainful employment in the rest of Missouri and 49 other states ….  and that’s reasonable under the law of non-competition.

What May be Included in the Agreement

Non-competes are often misunderstood and viewed as dreaded creatures designed to put people out of work. But they can be simple and fair. Remember the purpose is not that complicated. It’s to prevent a former employee or independent contractor from hustling your customers. It should be designed to give you time to readjust and keep your customers in the fold without interference or stress from a disgruntled former employee.

Non-compete agreements may include these restrictions: (1) no solicitation of current customers, (2) no competition for new customers within the non-compete area, (3) no employment by a competitor (4) no solicitation of your employees, and (5) non-disclosure of confidential information. If you terminate an employee without cause (2) cannot be enforced.

Can you get money damages for violation? Yes, but proving them may be very difficult. So, the critical element of any non-compete is the right to stop the violator, quickly. A well written non-compete should allow you, the former employer, to swiftly obtain a  restraining order stopping the violator and have the violator pay your cost of doing so. Lastly, be certain that your non-compete agreement includes a penalty that extends the non-compete period if there is a violation. It may take time for you to discover the violation and the violator may stall to see if he can run out the clock. The extension penalty prevents the violator from using your time against you.

Use a reasonable time and distance. Don’t be greedy, and explain your purpose to your employee. Caution: forms on the internet are not your friend. This is not a one size fits all document. A boilerplate document that you can’t explain to the judge could be fatal. Non-completes are not expensive and can be drafted by an attorney to fit your business. Then you can say “Judge here’s why we had our salesman sign this.” 

This article originally appeared in the March 2011 issue of the St. Louis Small Business Monthly.

Knowledge is Not a Commodity: Jim Borchers, a local attorney with the firm Evans & Dixon, helps entrepreneurs start and grow their businesses by capturing value in new opportunities, solving problems and managing risk.