Non-compete Agreements: What They Are, How They Help, and What to Do If One Has Been Violated
In today’s competitive market, business owners seek every advantage to stay ahead of their competition. A non-compete agreement can be an effective way to maintain valuable trade secrets, marketing plans, and client lists to preserve your competitive advantage. But there are important limitations on when a non-compete agreement can be used, and what a non-compete clause can and cannot do.
What Is a Non-Compete Agreement?
A non-compete agreement (also known as a non-compete clause, a covenant not to compete, or a non-compete covenant) is a contract or clause in a contract that limits a person’s ability to compete with former business partners by stealing trade secrets or customers, working for a competitor business, or starting a similar business for a specified period of time and in a specifically defined location after a business is sold or dissolved.
A non-compete agreement allows a business to keep valuable information private and prevents former business partners from using sensitive information like trade secrets, marketing plans, or client lists to start their own competitor business after the sale or dissolution of one business.
A non-compete agreement is an effective tool that can be used to ensure that your business maintains its competitive advantage. But to be enforceable, a non-compete agreement must adhere to certain guidelines and must be fair to all parties involved.
What Are the Limitations of a Non-Compete Clause?
Different states have different laws regarding non-compete clauses. North Dakota law Section 9-08-06 prohibits any kind of contract “by which anyone is restrained from exercising a lawful profession, trade, or business of any kind” that is not connected to the sale or dissolution of a business. This section prohibits non-compete clauses subject to two exceptions.
North Dakota permits non-compete clauses in the following circumstances: (1) in the course of selling a business a person may agree to “refrain from carrying on a similar business within a reasonable geographic area and for a reasonable amount of time, if...the buyer carries on a like business in that area”; and (2) upon or in anticipation of the sale dissolution of a business a partner, member, or shareholder “may agree that all or any number of them will not carry on a similar business within a reasonable geographic area…”
If one of these two exceptions are met, the non-compete agreement must be reasonable in both time and geographic area. The North Dakota Supreme Court has found that a non-compete agreement that extended a “radius of 60 miles” was reasonable and enforceable, and that 5 years was a reasonable amount of time. Whether a non-compete agreement agreement is enforceable will depend on the type of business that is being restrained.
In Minnesota, where non-compete clauses are not prohibited, an employer can use a non-compete agreement when an employee leaves a business and the business wants to prevent that employee from using information learned there to compete in the same market, whether as an employee for a competitor or by starting another business in the same field. To be enforceable, a Minnesota non-compete agreement must be supported by adequate “consideration” (something of value) in exchange for entering into the non-compete, and must serve a legitimate employer interest. Generally, the agreement must be entered into at the start of the employment relationship. If not, the covenant not to compete must be supported by independent consideration.
To serve a legitimate employer interest, a Minnesota non-compete agreement must protect: (1) an employer’s confidential information or trade secrets; (2) the employer’s customer goodwill and relationships; or (3) specialized training.
Even where non-compete agreements are not prohibited, they cannot be used to permanently bar an employee from working in a particular field ever again. To be effective and enforceable, a non-compete should be carefully drafted, and should only apply to certain key employees.
General non-compete agreements that apply to all employees may not hold up if challenged in court, and a non-compete agreement that is overly restrictive runs the risk of being struck down and found to be unenforceable if challenged in court. An effective, enforceable non-compete agreement must clearly specify the information that is protected, and must be limited in time and geographic scope.
Time and geographic limitations in a non-compete clause will, of course, vary depending on the location and the nature of your business. To be effective and enforceable, a non-compete should clearly designate where an employee can and cannot work, and must specify an exact amount of time that must pass before the employee can work in that field and location again.
How Can You Protect Your Business?
In a no non-compete state like North Dakota, you have several options to protect your business against the concern that you are “training your future competition.” First, your employment contract and employee handbook should clearly define that the business owns all information and work product. Second, make sure that all work product is designated as a trade secret under North Dakota law. Third, consider using a deferred compensation agreement, profit sharing, or part ownership to disincentivize people from leaving to work for competitors.
In Minnesota, where non-compete clauses are not prohibited, a non-compete agreement can be an effective tool to protect your business. If you believe a non-compete clause would be an effective tool for your business, have a business lawyer draft a non-compete agreement or include a non-compete clause for certain key employees.
Does Your Business Need a Non-compete Clause?
In Minnesota, a non-compete agreement can be a useful tool for preventing a former business partner from using sensitive information to compete by working for a competitor or starting their own competitor business. In North Dakota, where non-compete agreements are void in all but two specific circumstances, business owners must consider alternative ways of protecting their work product, customer lists, trade secrets, and competitive advantage.
What Should You Do If Your Non-Compete Clause Was Violated?
If you believe that a former business partner plans to work for a competitor after the sale or dissolution of a business, you can reach out to the new employer to explain the terms of the non-compete agreement and learn whether the individual will be asked to perform work that could violate the non-compete agreement.
If you believe a former business partner will or already has violated the terms of a non-compete agreement, ask your lawyer to write a “cease and desist” letter stating that your former partner is violating the terms of the agreement and asking them to stop.
Some non-compete agreements contain a clause that requires mediation or arbitration before filing a lawsuit. This is an opportunity to avoid taking the matter to court, and can help ensure that the matter remains private.
Other times, litigation is necessary to enforce the terms of a non-compete agreement. A North Dakota business lawyer can review the terms of the contract and the requirements for an enforceable non-compete agreement, help stop the violation from continuing, and seek compensation for any damages caused by a violation of the non-compete agreement.
Fremstad Law - Moving You Forward
If you are a business owner and have valuable trade secrets that you need to protect, the business lawyers at Fremstad Law can help by preparing a non-compete agreement, or helping you enforce a non-compete agreement against a former business partner.
Working with our experienced business lawyers allows you to focus on your business while we handle enforcement of a non-compete agreement.
With offices in Fargo and Valley City, business attorneys Joel Fremstad, James Teigland, Mark Western, and Brandt Doerr are here to help move your forward in North Dakota and Minnesota. Contact us today by calling (701) 478-7620.
