Non Compete/Consultancy Agreements

Stopping Key Ex-Employees from Working for Competitors

Better Golf, Inc. develops and sells new golf balls. Better Golf's Vice President of Research and Development ("R&D") is I.M. Disloyal. Disloyal has developed a unique dimple pattern that enables a golf ball to fly 50 yards longer than any other ball. Not only does the "longer ball" sell like hotcakes, but in addition competitors can't copy it. That's because Disloyal created the dimpling by an innovative secret process. Competitors can't figure out that process by looking at the ball. So, Better Golf decides to try to keep the process a secret.

The money starts rolling in, which is when I.M. Disloyal decides to sell out. Disloyal informs Better Golf that he has accepted an offer - at twice his salary - to work in the R&D department of the company's largest competitor, Copycat, Inc. What can Better Golf do about that? After all, there's little doubt Disloyal will disclose the secret process in return for the big salary.

In answer, there's not much that Better Golf can do, unless it has taken proper precautionary steps beforehand. One such step might be for Better Golf to have all its employees sign Non-compete Agreements in an attempt to contractually limit their post-employment activities. However, the Non-compete Agreements should be individually tailored to Disloyal and other key employees, to avoid having a court throw them out as overly broad.

Non-compete Agreements are meant to stop an ex-employee from disclosing his (or her) former employer's valuable trade-secret information to a competitor, or opening a competing business using the secret information. Non-compete Agreements are not meant to stop an ex-employee from earning a living practicing his trade, as long as he does not disclose or use the trade secrets.

What is a trade secret? A trade secret is defined as any business information used by a company, which gives that company a commercial advantage and which is not generally known by its competitors. Examples of trade secrets are: customer lists; secret processes; secret recipes; inventions still under wraps; and customized machinery made especially for the company.

Perhaps the most famous trade secret is the Coca-Cola® formula, which has been kept secret for over 100 years.

Non-compete Agreements, intended to protect trade secrets, must be reasonable to hold up in court. Ideally, such restrictive agreements should be tailored for each key employee to "spell out": (1) the general area of trade secrets that an employee will be dealing with - for example, dimple patterns in golf ball development; (2) the duration of the agreement, and a reason for that duration - for example, "It typically takes 2-3 years for a dimple pattern to move from conception to commercialization"; and (3) the geographical area in which the forbidden information can't be utilized by the ex-employee - for example, where Better Golf sells products. Better Golf only sells in the United States and Canada; hence, a worldwide prohibition would be inappropriate.

So what happens with I.M. Disloyal if he has only worked in dimple patterns his whole life? Can Better Golf stop Disloyal from working at Copycat, Inc., where Disloyal is sure to "spill the beans?"

A Non-compete Agreement (along the lines above) might succeed in stopping Disloyal from working in Copycat's R&D department, developing golf balls, but why leave things to chance. There is another approach which almost always succeeds - namely, a separate Post-Employment Consultancy Contract used in tandem with the Non-compete Agreement, or a consultancy clause that's built into the Non-compete Agreement.

In effect, the consultancy provision would enable Better Golf, at its sole option, to pay I.M. Disloyal not to work in the restricted field. Better Golf, if it chooses to, would pay I.M. Disloyal 100% of his salary starting at the time of termination, to assist Better Golf with related projects. The duration of the consultancy clause would be the same period as it would take competitors to recreate dimple-pattern molds: 2-3 years. See a sample consultancy clause below.

There's a fly in the ointment. Companies often dislike the concept of paying former employees money to stay away for a set period of time. Keep in mind, the consultancy agreement is only an option, which Better Golf can decline to enact. If Better Golf is making millions of dollars in profit per year off the longer ball, then it might be worthwhile to pay Disloyal his annual salary (e.g., $100,000-$150,000 per year) - no matter how distasteful that is - to keep the profits rolling in as long as possible.

If management at Better Golf balks, the consultancy arrangement could be "part-time" (50% of annual salary). There is an increased risk, however, that such a part-time arrangement, with its lesser compensation, would not be upheld in court.

For a "part-time" or "full-time" arrangement, Better Golf could, at its option, either: 1. Restrict Disloyal from working for a competitor; or 2. Permit employment with a competitor in a non-competitive manner.

In a part-time arrangement, if Disloyal is unable to obtain other employment because of the restrictions, Better Golf would pay Disloyal the additional amount required to meet Disloyal's pay at termination. If Disloyal is forced to take work which is not necessarily consistent with his training and skills because of the restrictions, Better Golf must pay him the difference between Disloyal's base pay at termination, plus cost-of-living increases, and any amount Disloyal is currently making.

Overall, the consultation contract is typically the most reasonable form of post-employment restriction for key employees. The ex-employee is not monetarily damaged, and courts are prone to uphold the restriction.