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A Better Partnership

Publications

May 2008
01
May 01, 2008

Non-Compete, Non-Solicit and Confidentiality Agreements: There Is a Difference

Virtually every employer with employees who have access to a customer list or other sensitive information have those employees sign some form of an agreement to protect that information.

There is, however, a difference in the protection that those agreements provide.

For example, some employers have employees sign the full panoply of non-compete, non-solicit and confidentiality agreements. Others, who may not have thought out the process entirely, may not have specific agreements in place, and still others may rely on more general statements about confidentiality of information either in an employee handbook or perhaps a separate signed document.

A confidentiality agreement (or statement regarding confidentiality in a handbook) provides some protection relating to customer lists and other information, but it does not provide certain safeguards relating to whether an employee may go to work for a competitor. For example, while a confidentiality agreement may protect against use of an employer's confidential customer information it still will not prevent, generally speaking, an employee from working for a competitor.

In order to retain the ability to assert that a former employee either cannot work for a competitor or at least solicit former customers, employers should consider non-compete and non-solicit agreements. These should be in addition to confidentiality agreements or general confidentiality statements in handbooks. These agreements typically restrict the employee from working for a competitor for a certain length of time in a certain geographic area. They also typically contain a clause restricting the employee from calling on the employer's customers for a certain period of time.

Having all three of these areas covered--non-compete, non-solicit and confidentiality--will give you the most flexibility in protecting your confidential information from unfair use by competitors. But it is no guarantee. Unlike typical contracts, if a non-competition agreement is breached by a former employee working for a competitor, that is not the end of the story.

In Michigan, non-competition agreements in the employment context were illegal until 1985, when the legislature passed the Michigan Anti-Trust Reform Act (MARA). MARA allows employers to obtain from an employee an agreement that prohibits an employee from working for a competitor as long as it protects an employer's reasonable competitive business interests and is reasonable in duration and geographical area. Given these conditions, it is simply not enough for an employer to show that an employee has signed a non-competition agreement and that it has been breached. Rather, unlike "normal" contracts, MARA adds another crucial layer of analysis--does the agreement protect the employer's reasonable competitive business interest?

This is a very fact-specific analysis. Often, determining whether a non-competition agreement will be enforced depends on the judge. But there are a few rules of thumb. Judges typically do not like prohibiting people from working. Rather, they want to know whether the employee is actually competing against the former employer unfairly. Most often, an employer must show that the goodwill it has built up with its customers is now being used to its disadvantage. For example, employers spend a lot of time and money allowing their employees to cultivate relationships with customers. When an employee leaves, the employer needs a certain period of time to get a new employee up to speed with those customers and build up a new relationship. If the former employee interferes with that process by soliciting those customers (based on the relationship the employer paid to establish), most judges will find that to be unfair. Under these circumstances, if the agreement is reasonable in the other respects mandated by MARA, it will likely be enforced. Having a confidentiality agreement in place to complement the non-compete and non-solicit agreements will also help with this analysis.

Understanding the interplay between the different types of agreements you may enter into with an employee to protect confidential information, and how they may be enforced, will allow you to better protect that information. If done properly, they will help avoid disputes and prepare for an orderly transition if an employee does decide to leave.

While these agreements should be tailored to your organization and specific needs, they are not generally a complicated task to undertake. We can review your existing agreements or help you draft new agreements to ensure that your business does not walk out the door should an employee go to work for a competitor. As the saying goes, "an ounce of prevention is worth a pound of cure." Contact any member of our Labor and Employment Group for help.
 

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