Every employer faces the risk of losing key or valuable employees to a competitor, or for that matter, to new business ventures of their own.  However, the real damage occurs when they walk out the door with		valuable company information and start using it against you.  If you prepared well for the inevitable parting of the ways, a covenant not to compete can save your business from potential disaster.

 What is a covenant not to compete?  In Oregon, it is an agreement between the employer and employee that the employee will not compete with the current employer in providing similar products, processes or services, either alone or as an employee of another, for a period of time and/or within a specified geographic area after termination.  The law governing non-competition agreements also covers similar types of agreements such as those prohibiting solicitation of customers or fellow employees.

When do you need a covenant not to compete and with whom do you need one?  First, you should consider having non-compete agreements with your key employees  - those upon whom your business depends for its daily functioning and who have the ability to successfully compete against you if they were to strike out on their own.  Second, any employees who have access to sensitive or proprietary information, perhaps “trade secrets,” should be asked to sign a covenant not to compete.  In Oregon, a trade secret is “information, including a drawing, cost data, customer list, formula, pattern, compilation, program, device, method, technique or process that: (a) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  For more information about trade secrets, see our article “What is a Trade Secret?”

You should be aware that some states, notably California, do not recognize non-competition agreements under most conditions.  If you have employees outside of Oregon, you may need to draft “noncompetes” with different terms to satisfy the local jurisdictional requirements, or you may simply be out of luck.

If you want your non-competition agreement to be enforceable in the state of Oregon, there are four ‘must haves’ to the agreement.  It must:

1. be entered into either at the inception of employment or when the employee gets a promotion.  Courts in Oregon will not enforce non-compete agreements if they were signed simply for salary increases or bonuses; the promotion must include an increase in responsibility;
2. protect a legitimate interest of the employer.  Legitimate interests include trade secrets, customer lists, sensitive documents or processes that have some value to you and would have value to your competitors;
3. be reasonable in duration. It must be no more restrictive than necessary to protect your business’ interests; and
4. be reasonable in geographic scope, again, using a reasonableness standard.  A court can modify the duration and/or the geographic scope of a non-compete agreement if it finds either to be too broad, or it can add reasonable limits if none are provided.

Employers can ask employees who have substantial involvement in management, personal contact with customers, or knowledge of trade secrets, to sign bonus restriction agreements.  These are agreements limiting or restraining competition, similar to a standard non-compete agreement and governed by the same rules laid out above.  If the employee violates this type of agreement, the employer can require the employee to forfeit profit sharing or bonus compensation not yet paid.  This type of agreement might be a good alternative considering the expense of obtaining an injunction against a violator, however, there must be some compensation holdback for this to be a viable tool.

So what happens if you ask an employee to sign a covenant not to compete and she refuses?  In 2002, the Oregon Supreme Court decided that refusing to sign a non-competition agreement may be grounds for termination.

In addition to following the rules laid out above, how can you ensure that the agreement you have in place will be enforceable?  The enforceability of a covenant not to compete often hinges on the measures the employer has taken to protect its proprietary information.  In other words, an ex-employee can argue that the information she is using in her new job is not really confidential.  You should review your internal policies and practices to ensure that the following are in place:

1. Adequate training of all employees on the importance of confidentiality and the procedures in place to maintain it.
2. Stamping or labeling confidential documents as such.
3. Making sure that customers, service providers and suppliers have confidentiality clauses in their written agreements with the company.
4. Having a one-for-one exchange system for certain sensitive documents such as customer lists.  The salesperson can’t get a new customer list until her old one is turned in.
5. Limiting access to sensitive information to those with a “need to know.”
6. Protecting confidential information from the press and from visitors.

Our recommendations: 

• Carefully consider who in your organization would be likely candidates for a non-compete agreement.  The next time you promote that person, consider asking them to sign a covenant.  If you are hiring a key employee or a new salesperson, you should ask her to sign one.
• Make sure that your agreements have teeth, and are uniformly enforced throughout the organization.  
• Review your internal policies and procedures to make sure everyone knows what information is confidential and how to protect it. 
• Include a collection effort in your exit interviews so that customer lists, confidential documents and other sensitive information in the employee’s workspace are accounted for before they depart.

Although you can’t erase the departing employee’s memory, you can effectively exercise some control over her behavior after she’s out the door. 

© 2004 Du Val Business Law, P.C. Suite 103 The Durham House 1012 SW King Ave.  Portland, Oregon