How to Create Non-Compete Covenants

Source: The CPA Journal

This comprehensive article provides excellent guidance to CPA firms in creating non-compete agreements. Here are some highlights:

• Enforcement of non-compete covenants varies widely by state. For example, in Alabama they are not recognized at all.
• A firm can protect itself from unfair competition by an ex employee. But it generally can’t protect itself by designating all its clients as untouchable. It can protect itself from use of confidential information or from loss of clients with whom the employee had a close relationship.
• Courts have refused to enforce non-compete covenants when clients were developed by the employee without use of any of the firm’s resources.
• Geographic restrictions may be reasonable if not too extensive. Geographic restrictions such as a 50-mile radius or five designated states have been upheld by courts. A geographic limitation may not be necessary if the agreement applies only to clients.
• Time periods vary widely by state. In Florida, for example, restricting competition for six months or less was deemed reasonable, but more than two years was unreasonable. In some states up to five years has been allowed.
• Some courts will, in effect, rewrite noncompete covenants that are too inclusive. But don’t count on it. In these instances some courts may not permit enforcement of any of the covenants.
• Provisions that require employees to pay the firm reasonable value for clients taken are looked upon favorably by courts. But if the value is unreasonable, it may be considered an unwarranted penalty.
• Non-compete agreements should be signed upon hiring, or at the time of a promotion or raise. Employees should be given sufficient time to read the agreement. A non-compete clause signed as a requirement for continued employment will probably be unenforceable.
• New client development should be a firm effort. The firm can promote this effort by paying for employee memberships in organizations that facilitate networking.
• Non-compete clauses should not be pervasive. They should be required only by those employees who pose potential risks of unfair competition.
• During exit interviews, employees should be reminded of their non-compete agreements. Some firms require departing employees to reveal (in the employment agreement) non-compete clauses to their new employers.
• Third parties can be liable for punitive damages if they persuade an employee to violate a non-compete agreement with a former firm. If the firm knows about the agreement, it should inform the employee that it won’t require him or her to do anything that would violate it.
• Don’t implement a non-compete agreement without the advice of counsel.

For the complete article, click here.

From The CPA Journal, A Publication of the New York State Society of CPAs, November 2007.