This is the fIfth in a series of articles discussing various issues related to privately-held businesses.
Gerry Dick Inside Indiana Business Editorial Series

Article Five – September 2007

Non-Competes Are Not Worth the Paper They Are Written On ... And Other Myths

All too often employers will choose not to protect their companies' most valuable assets with restrictive covenants (or employees will blithely sign such agreements with no intent of abiding by them) under the popular misconception that "non-competes aren't worth the paper they are written on."

Not so, at least in Indiana and a majority of other states.

There are three general categories of covenants, and one statute, that afford companies certain protections against unfair competition by former employees, independent contractors and business partners: (1) non-compete agreements, (2) non-solicitation agreements, (3) confidentiality agreements, and (4) the Uniform Trade Secrets Act. Businesses of all sizes can inventory their intangible assets – trade secrets, confidential information, customer relationships, goodwill, among others – and take steps to protect those assets with the proper combination of restrictive covenants.

“You can’t prevent me from pursuing my livelihood!” True, a non-compete that simply restricts an employee from competing against the former employer anywhere and in any fashion is, generally, overly broad and unenforceable. However, a non-compete agreement designed to protect an employer's trade secrets and confidential information (such as customer lists and databases, customer relationships, goodwill, and/or investment in special training or techniques), may be enforceable. In other words, the employer should have a legitimate "protectable interest" which the non-compete agreement is designed to address. To be enforceable, the non-compete agreement also must be "reasonable," which is a determination made by courts on a case-by-case basis. Because the enforceability of a non-compete agreement is determined on a case-by-case basis by a judge evaluating the facts and circumstances at hand, there is no "form" or cookie-cutter non-compete agreement that can suit all businesses. Instead, each business should inventory its protectable interests, and tailor a non-compete agreement to address those specific interests.

A non-solicitation agreement is a separate covenant that can provide an employer protection against a former employee’s solicitation of specifically defined customers and/or employees for a reasonable period of time. These agreements can be a powerful tool to prevent a former employee or business partner from "raiding" the employer's customers and/or employees. Again, however, such an agreement may not be overly broad, and should be drafted to the particular circumstances of the protectable interest and business at hand.

A confidentiality agreement is yet a third covenant which protects against the improper use or disclosure of sensitive information that is not generally available to the public. Unlike non-compete agreements and non-solicitation agreements, a confidentiality agreement may extend indefinitely, so long as the information remains confidential. A properly drafted confidentiality agreement can provide protections above and beyond those afforded by the Uniform Trade Secrets Act.

The Uniform Trade Secrets Act, which has been adopted in many states, including Indiana, provides certain protection against the misappropriation and use of trade secrets. However, the "trade secrets" protected by the statute are more narrow in scope than those that can be protected by a properly drafted confidentiality agreement. Nevertheless, the Trade Secrets Act may provide a basis for obtaining an injunction to prevent a former employee from using trade secrets in competition with the former employer. It can also provide a basis for obtaining damages for the improper use of trade secrets.

Each year, businesses in Indiana spend millions of dollars on inventory tracking systems, security systems, and other precautionary means to prevent the theft of tangible assets, but make little or no effort to protect the most valuable part of their business -- intangible assets, such as customer relationships, goodwill, and proprietary know-how. By requiring a properly drafted agreement containing a non-compete provision, non-solicitation provision, and/or confidentiality provision -- all tailored to the specific needs of your business -- you can provide added protection against your most valuable assets falling into the hands of a competitor or a former employee.

While this article focuses primarily on the employment context, restrictive covenants can also be used with certain independent contractors, in the business-to-business context (for example, requiring an employee non-solicitation provision when two companies have a relationship whereby one places its employees with the other company for projects or periods of time) and in the sale of business context (to protect the buyer’s investment and to prevent the seller from competing with or soliciting customers or employees of the buyer).

Properly drafted, a non-compete, non-solicitation and confidentiality agreement is invaluable to protecting your company’s most valued assets.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

Adam Arceneaux and Melanie Harris are partners in the Competitive Business Practices Litigation Group at Ice Miller LLP. Adam can be reached at: (317) 236-2137 or adam.arceneaux@icemiller.com. Melanie can be reached at: (317) 236-5996 or melanie.harris@icemiller.com.