Non-Compete Agreement Tips for Partners, Executives, and Employees

In this post, I continue the discussion about non-compete agreements in Connecticut.  This time, I focus on the employee side.  Here are 5 things to think about when leaving employment if you have a non-compete agreement.

 

  1. Do not believe water cooler experts.  Many employees come to believe what they hear at the water cooler about non-compete agreements.  The typical comments include: “Those things are thrown out of court,”  “John Smith had one of those, and he beat it in court.”  The reality is, some non-competes will be upheld in court in Connecticut, and others will not.  There is no bright line test.  Every case is unique and there are too many factors to cover in one blog post. 
  2. Get help sooner rather than later.  The biggest mistake employees make is failing to get an experienced attorney’s review of an employment contact BEFORE planning to leave.  Examples of these agreements include non-competition agreement, non-solicitation agreement, or confidentiality agreement.  I emphasize “experienced” because the law surrounding non-compete agreements and unfair competition is constantly changing.
  3. Develop an exit strategy.  Leaving without a plan is not a good idea. Employees need a plan that includes understanding the parameters of the agreement and mitigating the risks of breaching it.  I have seen clients lose sleep, jobs, and thousands of dollars because there was no plan in place.  I will offer more on exit strategies in a later post, but some ideas include negotiation with your existing employer, finding holes in the contract, modifying employment decisions to mitigate risks, and taking a wait and see approach.   

4. Be mindful of confidential information.   The idea here is to minimize your exposure to a lawsuit for theft of confidential information or misappropriation of trade secrets.  Determining whether information is protected as confidential or a trade secret might be a complex analysis.  The same can be said for improper use of such information.  Further, there could be valuable information that an employee is entitled to use but it depends on many factors. 

 

5. A written contract is not the only issue.  In the context of leaving an employment position or partnership, Connecticut recognizes causes of action that do not require a contract.  These include breach of the duty of loyalty, breach of fiduciary duty, misappropriation of trade secrets, computer crime, civil theft, and unfair trade practices.  Your exit strategy needs to consider all of these factors, and not only the contractual agreement.  

Deciding to Enforce A Non-Compete Agreement in Connecticut – 5 Tips

Many Connecticut business owners have agreements (so called "non-compete agreements") in place with their employees concerning competition or solicitation. When an employee leaves a company, business owners have to decide if they should try to enforce the non-compete agreement by filing a lawsuit or engaging an attorney. Here are 5 factors to consider:

 

1. Is the contract reasonable? I have reviewed hundreds of these agreements, and they are all different (even the agreements I draft). There are various legal and factual requirements that you will need to satisfy for enforcement of non-compete or non-solicitation contracts. However, in general, the first question you have to ask is whether the contract is reasonable in light of the business you are in and purpose behind the specific contractual terms.

For this reason, it is always a good idea to have an attorney draft your agreement specifically tailored for your legitimate business concerns. Getting a form template online and applying it to your business may seem like a cost effective approach, but what happens when you really need to enforce your agreement?

2. What are you trying to protect? Generally speaking, it is easier to convince a court to stop a departing employee from taking your customers or manufacturing process than it is to stop the employee from working for a competitor. For example, the chances of successful enforcement increases if your contract was drafted to protect customers the employee was working with as opposed to trying to stop the employee from working in any type of role for a competitor. Additionally, courts are much more likely to entertain an injunction for protection of legitimate confidential information.

3. Are you worried about creating a standard for other employees? Employees that leave always talk to the employees that stay behind. It is a fact of life. In addition, word gets around about the details of any settlement involving non-competes. Why? Well, for one, everyone wants to know whether a business will actually seek to enforce their contracts. If a company continually declines to enforce their non-compete agreements, other employees may get the idea that the same rule will apply. 

4. What are the risks involved?  It may be difficult to know the full extent of the risk posed by a departing employee. However, it is important not to underestimate the risks. I have seen circumstances where a business loses only one small client at first, but suffering major loses many months down the road. Some questions to consider: (1) have you lost clients or are you in danger of losing clients; (2) is there a danger of the employee disclosing or using legitimate confidential information; (3) what did the employee have access to while at work (i.e. client lists, trade secrets, and financial information); and (4) was there an exit interview conducted and return of confidential information verified.

 

5. Litigation costs v benefits. I ask clients to make a business decision by weighing the risks (see # 4) versus the costs involved. Litigation costs are dependent on a number of factors. Some examples of factors that impact litigation costs include (1) the nature of the dispute; (2) the strength of the contract; (3) the ability of the departing employee to defend the case; (4) the lawyer defending the case; and (5) the type of action you decide to bring.

These are only some of the many factors a business should consider when confronting a decision on enforcement of a non-compete.

Damages for Breach of Non-Compete Agreement In Connecticut

When deciding whether to hire an attorney to seek enforcement of a non-compete agreement in Connecticut, a business should consider the available remedies or damages.  The following are the basic remedies or damages for breach of a typical non-compete agreement in Connecticut.

1. Injunctive relief.  Injunctive relief basically means a court ordered act or prohibition against an act.  For example, when seeking to enforce a non-compete or non-solicitation agreement, your attorney will request that the court issue an order preventing the employee from working for a competitor.  If there is a non-solicitation clause in the contract, the attorney will ask the court to issue an order to prevent the departing employee from soliciting or "stealing" clients.  The court will only issue such an order if the agreement meets a series of factual requirements.   Essentially, the restrictions in the agreement must be reasonable in relation to protecting legitimate business interests.  

2. Actual losses.  In some situations, a business will have no measurable losses and will need to resort to injunctive relief only.  However, in other instances, a business will have provable loss of business from breach of an agreement.  The traditional rule for breach of contract is to measure the damages or losses to the business and not the gains of the departing employee or competing business.  A typical example would be the loss of incremental profits from losing a customer arising from the improper conduct of the departing employee.  In Connecticut, a business must prove these damages with reasonable certainty and not guesswork.  

3. Disgorgement of profits.  In certain circumstances, a business could win an award that disgorges (or takes away) the ill gotten gains or profits of the departing employee.  For this type of damages, the focus is on the profits of the departing employee.  

4. Attorney’s fees.  The traditional rule requires each party to pay their own attorney’s fees. However, if the employment contract has a provision that covers an award of attorney’s fees, a court may award attorney’s fees incurred in enforcement of the non-compete.

5. Punitive or multiple damages.  In a standard breach of contract case, punitive, exemplary, or multiple damages are not available.  However, if the conduct involved provides the basis for a violation of some other statutory or common law, a business may recover some type of extra contractual damages.  An example would be if the breaching conduct also provided the basis to prove a willful violation of Connecticut’s Uniform Trade Secrets Act.