Protect Your Business From the Consequences of Departing Employees

David Wolowitz headshot
David Wolowitz
Of Counsel, Education Law Group
January 1, 2000

When an employee departs from a company, whether voluntarily or due to termination by the employer, the former employer may be vulnerable in a number of respects. Among those vulnerabilities are: (1) the risk that the former employee may use and distribute the business’ highly sensitive information; (2) the risk that he/she may directly or indirectly solicit, take away, service or accept business from the former employer’s clients or customers; (3) the risk that he/she may solicit, employ or associate in a business relationship with the company’s remaining employees; and (4) the risk that the former employee may use the training and information acquired during his/her employment to engage in a competing business.

To help protect your company from the risks enumerated above, you may, among other things, require your employs to sign a Non-Compete, Non-Solicitation and Confidentiality Agreement. Such an agreement should be narrowly crafted to meet the specific needs of your business. It should be drafted to protect goodwill, clients/customer lists, service/product information, trade secrets, marketing procedures and strategies, pricing structures, contract terms, business plans, and other confidential business information.

A Non-Compete, Non-Solicitation and Confidentiality Agreement should contain numerous provisions including, but not limited to, provisions regarding restrictions on competition during employment, restrictions on disclosure of confidential information during or after employment, non-solicitation of existing employees and clients/customers, agreement not to compete, severability, and remedy for breach. The available remedies for a breach of such an agreement include injunctive relief, monetary damages and specific performance. Typically, when a former employer discovers the agreement has been breached, he or she will seek a temporary restraining order, preliminary injunction and permanent injunction against the former employee. The employee, however, will attempt to prove the agreement (or the specific provision being enforced) is unenforceable.

To be enforceable, a restrictive covenant contained in such an agreement must be “reasonable”. Since the restraints on the employee may be no greater than necessary for the protection of the employer’s legitimate interests, the restrictions in the agreement should be carefully and narrowly tailored to protect the employer’s specific interests. Another issue relevant to the enforceability of the agreement is the consideration needed to support it. Continued employment is adequate consideration for a non-compete agreement. It is important, however, that the employer bring to the employee’s attention the importance of the agreement they are being asked to sign. We suggest a cover letter accompany the agreement upon distribution to the employees. The cover letter should articulate the critical nature of the business’s confidential information, business relationships and goodwill, as well as highlight the significance of the agreement as an important legal document that should be reviewed carefully before it is signed.

A company that utilizes a Non-Compete, Non-Solicitation and Confidentiality Agreement to ensure that the important assets are not lost to a defecting employee is much more likely to deter departing employees and, if necessary, successfully defend itself should the agreement be breached.

In next month’s UPDATE, David Wolowitz and Sarah Knowlton will present the benefits of a comprehensive Information Security Policy which addresses the protection of the information that resides on, or travels through, the new technological devices increasingly used by business. An Information Security Policy is one mechanism which may be used by businesses to prevent the unauthorized use of information by an employee during and after employment with the company.

The New Hampshire Supreme Court employs a three-pronged test to determine reasonableness of a restrictive convenant: (1) Is the restriction greater than necessary to protect the legitimate interests of the employer?; (2) Does the restriction impose an undue hardship on the employee?; and (3) Is the restriction to the public interest?