Best Practices for Non-Compete Agreements

Best Practices for Non-Compete Agreements

It is tough when an agent wishes to move on to a new agency or company. You lose that person’s expertise and connection with clients. But there is also another potential loss; your trade secrets and client list. Many agencies seek to protect those assets by requiring non-compete agreements upon hiring. However, this solution may not be as effective as you hope, and sometimes, it can open you up to legal liability.

Why Would You Need a Non-Compete Agreement?

A non-compete agreement is a contract where a new employee agrees they will not start a competing business, work for a competitor, or use an agency’s trade secrets. Employers typically present these agreements at hiring, although some may introduce them later in employment.

A trade secret refers to confidential information that holds economic value. The foremost example in the insurance industry is client lists.

Insurance agencies keep client lists confidential to prevent competitors from pursuing them. However, when an agent leaves for another employer, it is reasonable to fear that they will bring trade secrets and use them to their new employer’s advantage. So, the non-compete agreement creates a contractual duty to avoid sharing lists and other trade secrets that could benefit a competitor.

Trade Secret Protection Tips

Non-compete agreements are a favorite way to protect trade secrets. Former agents must follow their terms or risk legal liability. It gives you a cause of action if a former employee leaks your trade secrets.

But you need to be careful with this tool. Non-compete agreements can not be unreasonably limited, or you cannot enforce them. Also, some states limit their enforcement—assuming they allow them at all. So, it is crucial to know how to draft an effective non-compete agreement that protects your trade secrets without compromising your employees’ ability to make a living. These tips will help you achieve that.

Know Your State Laws

State law concerning non-compete agreements varies between states. In most states, non-compete agreements work if they are reasonable.

However, a non-compete agreement will not work in every state. For example, they are not enforceable in North Dakota or Oklahoma. In California, making a non-compete agreement a condition of employment allows the potential employee to sue you. New York state is considering legislation that prohibits non-compete agreements when employees earn less than $15 per hour.

If you wish to use non-compete agreements, check and make sure they are permissible in your state. This chart offers some guidance, or you can consult with your company’s in-house legal department.

Limit Effective Time

If you can use a non-compete agreement in your state, know that it cannot last forever. Courts do not uphold agreements that remain in effect for over two years. Therefore, you are more likely to have an enforceable non-compete agreement if you limit its enforceability for one to two years.

Define Territory

Effective non-compete agreements are not national in scope. Instead, they limit competition within a specific territory, including cities, counties, or states.

For example, if your agent moves to another office on the other side of your city, your non-compete agreement is likely enforceable. For the period defined in the contract, your former agent cannot solicit your customers or use your trade secrets to the new employer’s advantage. However, this becomes difficult to enforce if your former agent moves to another state or country. It is unlikely they will interact with your customers in those cases, so you cannot impose limits on them.

Know What Is Allowed

Even with an active non-compete agreement, your agent can have limited contact with customers. For example, courts upheld insurance agents sending move announcement postcards to their current files as long as they inform rather than solicit. So, if your former agent wishes to do this, you cannot stop them unless the postcards directly solicit business.

There is a risk because clients may wish to continue business with your agent and move to their new office. Clients should have the choice, and taking that away will not make a good impression. As long as all they do is respond to a moving announcement, that is appropriate.

Define Trade Secrets

The non-compete must state your why; otherwise, it is vague and enforceable. Make the trade secrets you wish to protect clear. These can include client lists, but also office procedures, proprietary software, and unique valuation formulas. Name these assets precisely with no detail that compromises their confidentiality. Generally stating you do not want an agent to take knowledge and skills to a new company will not suffice in a non-compete agreement because that is not specific or limited.

Limit Prohibitions

Non-compete agreements should specifically list prohibitions. Stating, “do not compete” may not work because it is vague. Instead, make a short list of direct competitors or state that an employee cannot start a new business in your field.

Do not broadly state “all insurance companies” as that is unreasonably restrictive. Insurance companies sell different products. If your former employee moves from employee benefits coverage to casualty and property, that is not a direct competitor. A court will likely consider that no threat to your trade secrets and deny enforcing your non-compete agreement.

Do Not Push

Never push non-compete on your employees. Instead, give them time to consider the terms and consult with legal counsel. This agreement affects how they will make a living if they decide to move on; they must assess those impacts.

If you try to rush the process or make the agreement a requirement, you risk facing legal liability (especially in California.) While it can be nerve-wracking to wait and hope the employee signs the contract, it is not worth damages and fines to pressure them into it.

Proceed with Caution

If your state allows them, a limited short-term non-compete may be reasonable to protect your bottom line. But do not abuse the privilege by imposing limits on employees that make it impossible for them to work.

While non-competes may seem necessary, courts scrutinize them thoroughly and look for reasons to invalidate them. So keep them limited to essential elements and do not overreach. While this article intends to provide an excellent overview of non-compete agreements, take any specific legal questions to your in-house legal department to ensure you can enforce these contracts.

 

The American Agents Alliance wishes to support your success in any way possible—including avoiding legal issues like misusing non-compete agreements. Become a member today to enjoy our many benefits.

 

Sources

https://www.uspto.gov/ip-policy/trade-secret-policy

https://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/detail/regulating-the-use-of-noncompete-agreements-for-lower-salary-employees#_ftnref3

https://www.faircompetitionlaw.com/wp-content/uploads/2020/12/Noncompetes-50-State-Survey-Chart-20201218.pdf

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