Table Of ContentHow to Create
a Noncompete
Agreement
by Attorney Shannon Miehe
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First Edition JANUARY 2002
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Miehe, Shannon, 1971-
How to create a noncompete agreement / by Shannon Miehe.
p. cm.
Includes index.
ISBN 0-87337-714-1
1. Covenants not to compete--United States. 2. Small business--Law and legisla-
tion--United states. 3. Businesspeople--United States--Handbooks, manuals, etc.
I. Title.
KF3463.Z9 M54 2001
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Acknowledgments
Many thanks to the people at Nolo who made this book happen: to my editor, Beth
Laurence, for her infinite patience, careful editing and uncanny knack for translating
a complicated legal subject into English; to Jake Warner, for dreaming this whole
thing up in the first place; and to the other editors and authors at Nolo who encour-
aged me to keep writing and made me believe I’d actually finish.
About the Author
Shannon Miehe received her undergraduate degree from Stanford University and
her law degree from the University of Southern California Law School. Before join-
ing Nolo, Ms. Miehe was a corporate attorney with a large Los Angeles law firm,
and spent several years representing small and mid-size entrepreneurial companies
in connection with mergers, acquisitions and business formation issues. She edits
many of Nolo’s small business products, including Legal Forms for Starting & Run-
ning a Small Business, The Partnership Book and Tax Savvy for Small Business.
Table of Contents
Introduction
Chapter 1: What’s In a Noncompete Agreement?
A. Making an Enforceable Agreement..........................................................................1/3
B. Noncompetition Provisions......................................................................................1/4
C. Nondisclosure Provisions......................................................................................1/12
D. Managing Your Secrets So They Stay That Way......................................................1/21
E. Avoid Using Others’ Trade Secrets.........................................................................1/24
F. Nonsolicitation Provisions.....................................................................................1/26
Chapter 2: When to Use a Noncompete Agreement
A. Who Should Sign a Noncompete Agreement............................................................2/2
B. States That Restrict Noncompetition Clauses ..............................................................2/6
Chapter 3: Using Noncompete Agreements for Employees
A. The Cost of Your Noncompete Agreement.................................................................3/2
B. New Employees...................................................................................................3/3
C. Existing Employees................................................................................................3/8
D. Departing Employees...........................................................................................3/12
Chapter 4: Creating a Noncompete Agreement for an Employee
A. The Introductory Clauses.........................................................................................4/4
B. Description of the Work Relationship........................................................................4/7
C. The Noncompete Clauses ......................................................................................4/7
D. Additional Clauses for the Severance Agreement......................................................4/15
E. Boilerplate Clauses..............................................................................................4/19
F. Clauses Not Included in Our Employee Agreements .................................................4/26
G. Instructions for Amendment Form............................................................................4/28
H. Completing Your Agreement.................................................................................4/29
Chapter 5: Using Noncompete Agreements for
Independent Contractors
A. Identifying Independent Contractors .........................................................................5/2
B. Contractor Must Benefit From Signing Noncompete Agreement.....................................5/9
C. Noncompete Agreements for New, Existing and Departing Contractors.........................5/9
Chapter 6: Creating an Independent Contractor Agreement
A. The Introductory Clauses.........................................................................................6/5
B. Description of the Work Relationship........................................................................6/7
C. The Noncompete Clauses ....................................................................................6/14
D. Additional Clauses for Termination Agreements........................................................6/22
E. Standard Clauses................................................................................................6/25
F. Clauses Not Included in Our Agreements................................................................6/31
G. Instructions for Amendment Form............................................................................6/32
H. Completing Your Agreement.................................................................................6/34
Chapter 7: When Workers Depart: Revisiting Your Agreement
A. Understand Your Rights..........................................................................................7/2
B. Steps to Take When a Worker Departs ....................................................................7/8
Chapter 8: Help Beyond This Book
A. The “Legal Coach” Arrangement..............................................................................8/2
B. Finding a Lawyer..................................................................................................8/4
C. Paying for a Lawyer ..............................................................................................8/5
D. Doing Self-Help Research.....................................................................................8/10
E. Nolo Employment and Small Business Resources......................................................8/11
Appendix 1
How to Use the CD-ROM
Appendix 2
Noncompete Statutes
Appendix 3
Forms for Businesses With Employees
Forms to Use With Independent Contractors
Introduction
W
hether you own a bakery, trade secrets, like a recipe, manufacturing
run a yoga studio or operate process or customer list, with them.
a small public relations firm, Company loyalty—a quaint concept
you probably give many of your employ- that existed throughout most of the 20th
ees and independent contractors access to century—has gone the way of hoop skirts
confidential details about your business and electric typewriters. This change in
(for example, marketing strategies, produc- attitude is reflected in the numbers. Ac-
tion know-how or client lists). And you no cording to some studies, the average
doubt invest a lot of time and money train- worker in the United States today will hold
ing these people in your way of doing more than eight different jobs between the
business. When a former worker starts a ages of 18 and 32, and employees today
competing business or goes to work for a are 40% more likely to voluntarily change
competitor, a lot of this information—and jobs than they were five years ago. That
all of the training—travels with your ex- means your employees and independent
worker. contractors are much more likely than ever
How likely is it that a former worker before to go to work for one of your com-
will compete? Consider this—according to petitors—and possibly take other employ-
the National Federation of Independent ees with them.
Businesses, approximately 50% of all new Your employees may be invited to
businesses are started by former employ- leave your business, too. Because the pool
ees of small companies. In other words, of qualified workers is limited (especially
it’s likely that the company you’ve worked in the technology sector), many employers
hard to build will be the foundation of a turn to other companies, often competi-
former worker’s successful competing tors, to find highly trained, knowledgeable
business. And since people are changing workers who may want to move on to
jobs in record numbers, it’s even more greener pastures. For instance, a compet-
likely that your workers will go to work ing company could offer one of your em-
for a competitor and take some of your ployees a fat pay raise, benefits and other
I/2 HOW TO CREATE A NONCOMPETE AGREEMENT
perks in hopes of cashing in on the train-
Let’s Get the
ing you provided.
Terminology Straight
Although employee turnover can cost
Lawyers have managed to create some
you money, it can hurt your business even
confusion when it comes to the terms
more when former workers take your
used in noncompete agreements.
trade secrets, and sometimes your custom-
Here’s what you have to understand:
ers and other employees, to a competitor.
A noncompete agreement usually con-
Many employers think they’re helpless to
sists of three parts, or clauses:
stop a former worker from engaging in
• An agreement not to disclose
this kind of behavior, but they’re not.
trade secrets, called a nondisclo-
sure clause
How Noncompete Agreements • An agreement not to solicit other
Can Protect Your Business employees or customers, called a
nonsolicitation clause, and
Using a carefully written and signed agree- • An agreement not to compete
ment between you and your worker, you with a former employer, called a
can keep a former worker from disclosing noncompete clause.
your confidential information, stealing Perhaps you can already see the
your customers or employees and, in most cause for confusion: that part of a
states, from competing against you. This noncompete agreement that covers
powerful trio of agreements will also make working for competitors—the
it difficult for competitive businesses to try noncompete clause—also uses the
to profit from your hard-won secrets by term “noncompete.”
poaching or raiding your workforce for As we’ll explain in “Is a Written
your most knowledgeable, experienced Agreement Really Necessary?” below,
employees. After all, if you’ve effectively an employer may use all three
silenced (or tethered) an employee with clauses, or just one or two, in a
enforceable agreements, there’s no incen- noncompete agreement. To try to
tive to try to hire them away. keep confusion at a minimum in this
book, when the noncompete clause is
absent from a particular agreement,
we’ll refer to the agreement as a non-
disclosure agreement, a nonsolicitation
agreement, or a nondisclosure and
nonsolicitation agreement. When all
three clauses are present, we’ll use
the term noncompete agreement.
INTRODUCTION I/3
It would be nice if employers every- “noncompetition clause,” which places le-
where could choose to include all three gal limits on:
clauses in a noncompete agreement. Un- • for whom a former worker can work
fortunately, several states limit your and what type of business the
choices. Let’s start with what all employers worker can start or run
can do: All states allow noncompete • the amount of time a former worker
agreements to control: must wait before taking a competing
• what information of yours a former position or starting a competing
worker can use or disclose in a com- business, and
peting business (in the agreement’s • where in the United States a former
“nondisclosure” clause), and worker can compete against you.
• whether a former worker can en- These rules are summarized in “States
courage your clients, customers and That Allow Noncompete, Nondisclosure
employees to leave your company and Nonsolicitation Agreements,” below.
(in the agreement’s “nonsolicitation” If your state does not allow you to ask
clause). a worker to sign an agreement in which
Not all states, however, allow employ- the worker promises not to compete, you
ers to prevent former workers from com- can still protect yourself against the loss of
peting with them—by working for a com- trade secrets, customers and employees
petitor or starting a competing business of with an agreement containing nondisclo-
their own. In the states of California, Mon- sure and nonsolicitation clauses. If your
tana, North Dakota and Oklahoma, an state doesn’t permit workers to enter into
agreement that limits whom he can work noncompetition agreements, see Chapter
for after he stops working for your busi- 2, Section B, for more information on
ness generally won’t be enforced. In sev- these states’ laws and how you can use
eral other states (Alabama, Colorado, nondisclosure and nonsolicitation agree-
Florida, Oregon and Texas), you can keep ments to comply with them. But if you do
a worker from competing against you only jump ahead, be sure to return to Chapter 1
in certain circumstances. to learn about creating enforceable nondis-
In all other states, however, a closure and nonsolicitation agreements.
noncompete agreement can contain a
I/4 HOW TO CREATE A NONCOMPETE AGREEMENT
States That Allow Noncompete, Nondisclosure and Nonsolicitation Agreements
Whether you can restrict your employees’ abilities to compete, disclose and solicit
depends on where your business is located, as shown below.
California, Montana, Alabama, Colorado, All other
North Dakota Florida, Oregon states
and Oklahoma and Texas
Nondisclosure yes yes yes
agreement
Nonsolicitation yes yes yes
agreement
Noncompetition no limited circumstances yes
agreement
EXAMPLE: Sarah operates her own clients and encouraged some of Sarah’s
public relations firm in Chicago. After employees to join her. Sarah is irritated
working by herself for several years, and worried about what Ann’s competi-
Sarah hires Ann. Although Ann has tion will do to her business.
little P.R. experience she quickly
Luckily, Sarah had the foresight to
learns the business from Sarah and
require Ann to sign a noncompete
soon has unrestricted access to Sarah’s
agreement before Ann started her job.
client database (which contains all
Sarah reminds Ann that she has signed
kinds of juicy tidbits—and hard-earned
a noncompete agreement that (1) bars
information—about the clients). Ann
Ann from competing against Sarah for
also has frequent contact with Sarah’s
a period of six months after she leaves
clients. As Sarah’s business grows, she
Sarah’s company in the same geo-
hires more employees but only Ann,
graphic area in which Sarah does busi-
her trusted assistant, has full access to
ness, (2) prohibits her from soliciting
the confidential client database. One
Sarah’s clients and employees and (3)
day, Ann announces she’s quitting to
prevents her from stealing Sarah’s con-
form her own public relations firm in
fidential information. Ann laughs at
the same town.
Sarah and says, “Just try to enforce it.”
Sarah also finds out that Ann has
Never one to back down from a chal-
made copies of Sarah’s confidential cli-
lenge, Sarah decides to take Ann’s ad-
ent database, solicited some of Sarah’s
vice. Armed with evidence that Ann
INTRODUCTION I/5
has pilfered Sarah’s client list and con- circumstances. We discuss the require-
fidential files, Sarah goes to court to ments for creating an enforceable non-
obtain a preliminary injunction—an compete agreement in Chapter 1, and the
order from the judge—that will pre- specific state rules in Chapter 2, Section B.
vent Ann from engaging in any of the
prohibited activities set forth in the This book deals only with non-
agreement until the case is over. Be- compete agreements for employ-
cause Sarah does business in Illinois ees and independent contractors. Con-
and the noncompete agreement is sult an attorney if you need a noncompete
governed by Illinois law, she brings agreement for a person from whom you’re
the lawsuit in a court in Chicago. Since buying a business or for a co-owner who’s
Illinois courts are quite willing to en- leaving your partnership, limited liability
force properly drafted noncompete company (LLC) or limited liability partner-
agreements, enforcing the agreement ship (LLP).
does not turn out to be a problem.
The judge orders Ann to stop using
information she gathered while in
Sarah’s employ, refrain from soliciting Is a Written Agreement Really
Necessary?
Sarah’s employees or customers and, if
she wants to continue to run her busi-
ness, to do so in a distant city. Like many employers, you may have an
amicable, trusting relationship with your
As this example illustrates, a noncom-
key workers, and may even be good
pete agreement can be a very useful tool
friends with them. You may wonder
in protecting your business. However,
whether a written agreement is necessary
there are some strict rules you must com-
if the worker assures you she won’t use
ply with before a court will enforce one
your information, compete with you or so-
against a former worker. As you read this
licit your customers when she leaves. Al-
book, keep in mind that courts are heavily
though a verbal assurance may theoreti-
biased in favor of free competition and the
cally bind a worker, don’t rely on it. With
unrestrained ability to earn a livelihood
nothing in writing, it will be your word
when they decide whether or not to en-
against the worker’s if you ended up in
force a noncompete agreement against a
court trying to enforce the oral promise.
former worker. And some states, such as
(For information on your legal rights with-
California, have decided that these rights
out a written noncompete agreement, see
are so important that noncompete agree-
Chapter 7, Section A.)
ments should only be enforced in extreme
