According to the American Bar Association, there are many different types of restrictive covenants. Many may already be familiar to you, while others are more uncommon, at least in the United States. 

Non-solicitation 

If your employees sign a non-solicitation agreement, it means that they agree not to try to lure away your customers to do business with them instead. Non-solicitation agreements are usually only effective for a limited amount of time, but they apply to past, present and prospective customers. 

Anti-raiding 

An anti-raiding agreement is somewhat similar to a non-solicitation agreement. Where a non-solicitation agreement ensures that former employees will not poach your customers, an anti-raiding agreement prevents them from hiring away their co-workers upon leaving the company. 

Non-competition 

This type is very common but also the most restrictive. Upon leaving the company, your former employees agree not to compete with you for a specified period of time within a particular geographic area. Enforcing non-compete agreements can be challenging because of their restrictiveness, but it is possible to create one that should hold up. 

Confidentiality/Non-disclosure 

An employee may gain confidential or proprietary information about you, your company or your clients. A confidentiality agreement prevents him or her from disclosing or using that information. This applies to any information that is not publicly available even if it is not technically a trade secret. Some people use the terms “confidentiality agreement” and “non-disclosure agreement” interchangeably, but there may be a difference depending on the jurisdiction. 

Restrictive covenants can be controversial, and some jurisdictions make them difficult to enforce. However, if they are not injurious to the public interest, impose no undue hardship and protect your legitimate business interests, they should meet the necessary standard of reasonableness. 

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Nevertheless, it is possible to write an agreement that the court is likely to uphold. The American Bar Association offers the following best practices for writing enforceable non-competes.

1. Acquire necessary signatures

A non-compete should be a binding contract between you and your workers. Therefore, you should not only obtain employee signatures, but you should also sign the agreement yourself.

2. Provide adequate consideration

When you impose restrictions or limitations on employees’ activities, you need to offer them something of value in return. The legal term for this is a consideration. If you are asking a new employee to sign a non-compete agreement, the job offer itself is sufficient consideration. However, you must offer existing workers something more, such as a special bonus, stock grant or promotion.

3. Limit the scope of the restrictions

The court will make a determination as to whether the restrictions that you have imposed on your employees are reasonable. The broader the terms of your non-compete agreement, the more likely the court will be to reject it. Limit its scope to a specific geographic area, such as a particular city or state, and impose a reasonable time limitation, such as one year.

4. Do not involve all employees

If you ask all employees to sign a non-compete agreement, the court may find that this unreasonably imposes an undue hardship on some of them. Only require it of employees with access to sensitive information. 

These tips will not guarantee that the court will uphold your non-compete agreement. However, they may improve your chances of enforcing it successfully. 

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According to Chron.com, bylaws set forth the rules and regulations by which the corporation will operate. Not only are bylaws necessary, but they must comply with state corporate law. For example, the bylaws should set the time and date that the annual shareholder meeting, which state law requires, will take place. The board of directors holds an organizational meeting to write corporate bylaws shortly after filing the articles of incorporation with the state.

However, bylaws only go so far. They do not say anything about shareholders’ rights or their obligations to one another. Though not required by state corporate law, a shareholder agreement does address the relationships between shareholders.

For example, someday you may wish to withdraw from the company voluntarily, or unfortunate circumstances may arise that render you unable to continue your involvement in it. The shareholder agreement may include a buy-sell provision that would clearly describe what should happen in this situation. This may help to avoid business ownership disputes that could otherwise result.

If there is a dispute between the corporation’s bylaws and the shareholder agreement, the latter usually takes precedence. The shareholder agreement should include a provision for when a situation like this arises. Following the resolution of the conflict, the next step should be to amend the bylaws to reflect the change and revise the wording that caused the initial dispute.

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The concept of non-compete agreements makes a lot of sense from the business perspective. A person’s employment after leaving a specific company may be restricted in order to protect the interests of the first company. The restrictions placed on employees generally include a geographical range, a time duration and potentially even a scope of work. 

According to Forbes, a good non-compete agreement includes some elements similar to that of a nondisclosure agreement in that the contract should safeguard company sensitive information from being shared externally. Such information subject to protection may include sales and marketing strategies, product development or design information, financial data and more. 

The ability to enforce a non-compete agreement may be influenced by a variety of factors, including the level of reasonableness attributed to the original agreement. An agreement designed to last five years, for example, may not be considered reasonable whereas a contract spanning 12 months may be. Companies should be judicious about which employees they require to sign non-compete agreements as well. Persons working in capacities where they have regular access to critical information should be the target for these types of contracts. 

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Learn how to shield your business’s trade secrets and explore whether you may be eligible for damages.

What is a trade secret?

Any information that creates or could potentially create value for your business constitutes a trade secret if you have made reasonable attempts to keep it confidential. Examples include databases, processes, techniques, documents, devices, computer programs and formulas. If another party can easily develop or reverse-engineer the information in question, it is not a trade secret.

What constitutes misappropriation?

Under state law, misappropriation occurs when another person, business or entity uses, discloses or acquires trade secrets without your consent or authority. However, if the third party in question got the trade secret from someone who had the right to disclose it or through reverse-engineering or independent development, misappropriation has not occurred.

What are the available legal remedies for misappropriation?

You have three years to file a lawsuit for misappropriation of trade secrets in North Carolina. If you are able to prove misappropriation, the court may order:

• An injunction that requires the defendant to discontinue these actions and keep the trade secrets confidential
• Economic damages that reflect the harm to your business caused by misappropriation of the trade secrets, which may include any profits the defendant obtained from these actions
• Punitive damages and attorney fees if the defendant acted maliciously or willfully

Keep in mind that you cannot pursue a lawsuit unless you have taken steps to shield your company’s trade secrets from public knowledge. For example, you should carefully control access to this information and clearly label confidential information as such. Employees should also sign non-disclosure agreements and non-compete agreements that specifically limit the use and disclosure of trade secrets.

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According to QuickBooks, many small business owners who are hoping to protect confidential information that helps their businesses succeed do so by making all new hires sign what is known as a nondisclosure agreement. In simple terms, a nondisclosure agreement is a signed, legally binding document that prevents your hires and employees from revealing confidential information about your entity. 

Often, the strongest nondisclosure agreements are those that are relatively brief and clear. Avoid using complicated language or otherwise making your agreement so complex that someone could potentially argue the validity or intent of it. While keeping it relatively brief, there are some key matters you may find it beneficial to address in yours. 

For example, make sure you are very specific in your nondisclosure agreement about exactly what information it protects. If, for example, you want any oral communications made by employees to fall under it, make sure to note this. Similarly, you may want to discuss what information the agreement does not explicitly cover. It may, too, serve you well in the long run to have a notary present when your employees sign the nondisclosure agreement to help prevent potential litigation down the line. Learn more about business litigation and related issues on our webpage. 

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Not all NDAs are considered enforceable in the eyes of the court. For example, employers are not permitted to prevent employees from talking about wrongdoing in the workplace or any crimes committed. In this case, an employee can request that the court throw out the NDA for its lack of validity. Doing so would allow a person to go against the terms of the agreement without fear of reprisal, such as when reporting a workplace for violations that endanger workers.

When NDAs are breached, the person disclosing information may be subject to a number of punishments and penalties. Punishments can include terminated employment if the person is still working for the employer. A person may also be fined for their disclosure, and this sum of money is usually agreed upon in the original NDA. A lawsuit may also result from the breach, depending on its nature.

When an NDA is linked to a settlement, such as money provided after a work injury or other issue, breaking the contract could result in an employee being asked to return the full sum of the settlement. Workers may also be asked to pay liquidated damages for each separate breach, which can become quite expensive depending on how many breaches are cited within a given case. If you believe a current or former worker has breached your company’s NDA, the next step is to contact an attorney with experience in this area of the law.

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Learn more about what type of actions the state considers unfair trade, which requires a three-part test to determine whether the injured party can receive legal damages.

Was the action unfair or deceptive?

You must show that the business actions in question were either deceptive or unfair. Deceptive actions are those that are unethical, immoral and/or run contrary to established law or policy. The defendant must assert his or her power in a way that injures a consumer with the potential to deceive, though the deception need not be successful or intentional for a lawsuit to succeed. However, the defendant may argue that he or she acted in good faith.

Proving unfairness requires the plaintiff to show that the business’s practices negatively impact consumers. The court will consider whether the actions violate policy and/or review the policy’s effects on clients and the public.

Were you and the defendant in commerce with one another?

If you purchased a product or service from the defendant, an act of commerce occurred. Any type of trade or business activity can result in an unfair practices claim, even if no contractual obligation existed. In fact, breach of contract cases fall under a separate North Carolina statute. Examples of unfair practices include:

• False representation of a product or service
• Failure to inspect a product for sale
• Knowingly or intentionally making false statements about a product or service
• Refusal to honor a warranty in bad faith
• Lying to the client

Did the unfair or deceptive actions cause actual damage?

The court defines actual damage as:

• Loss of distinctive, specific property
• Loss of an asset’s appreciated value
• Any other elements of damage displayed by the evidence in the case

In some cases, plaintiffs can receive treble damages. This award equals three times your actual related damages.

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MarketWatch explains that when you give equity, you give a share of your ownership in the business, which is not something to take lightly. You should always protect yourself with an agreement on what happens to the ownership of the equity if the employee leaves the company.

In granting him or her ownership in your company, you give that employee some control. The employee has certain rights as an owner and access to documents that he or she would not usually have as an employee. It gives the employee a lot of leverage that could be bad if he or she leaves the company, especially if you fire him or her.

Your employee will have voting rights and could have an impact on the running of your company. It is possible for him or her to cause issues even when he or she is leaving the company, so you need to protect yourself, other owners, employees and the business.

A better alternative to providing equity is to offer some other type of benefit that is highly sought after, such as excellent medical insurance or a stellar vacation/time-off policy. These options do not affect your business as much as giving away equity can. This information is for education and is not legal advice.

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Typically, the terms of the NDA include what happens if the agreement is later breached. This can result in a lawsuit, during which the employer would sue you for breach of contract and pursue financial damages to remedy the issue. if you’re currently still employed by the company, it’s likely that you’ll be fired for disclosing the information. You may also be subject to liquidated damages. These are fines that must be paid for each individual breach cited within the lawsuit. In the event your NDA was part of a settlement agreement, you may be ordered to repay the settlement for the unlawful disclosure.

In some cases, employees may want to expose confidential information for the greater good. This can occur if a company is making dangerous violations in the workplace or mistreating its employees. Keep in mind that any clauses that go against the letter of the law will probably not be enforceable in the first place. For instance, if employees are obligated to withhold information about illegal activities, chances are that NDA won’t be considered valid.

No matter the reason, it’s best to consult an attorney before breaking an NDA. It may be possible to have the document thrown out of court. You’ll also be able to understand exactly what is obligated of you from the agreement and if there are any issues with enforceability. If you have concerns about an NDA before signing, it’s best to hold off until you get answers. However, this can be difficult since employment may be contingent on you signing the NDA.

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