Keeping former employees away from your customers

Consider the following hypothetical situation: You are a commercial roofing contractor who has spent many years establishing relationships with customers. A great deal of your company's success is the result of the efforts of two key employees who have been with your company since its formation. One of these employees is your leading salesman; the other is your chief job estimator.

One morning, these two employees tell you that while attending industry meetings during the previous few months, they were approached and recruited for employment by a competing company. The employees then announce they have accepted employment with your competitor. You thank the employees for their hard work and efforts and wish them luck in their new employment. When the employees leave, they take the collection of customer business cards they accumulated during their years with your company.

Weeks pass, and you begin to notice a drop in business. You hear many of your customers are doing business with the roofing company that now employs your former salesman and job estimator. You suspect your former employees re-established contact with your customers. Can you do anything about it? Well, that depends.

Restrictive covenants

One easy but often overlooked way to protect the investment you make in your customer relationships is to require employees who interact with customers or work with confidential information to be bound by a noncompete or nonsolicitation agreement or both.

Many roofing contractors avoid executing these types of agreements under the false belief the agreements are unenforceable. To the contrary, a carefully drafted noncompete or nonsolicitation provision can be used to prohibit former employees from contacting or soliciting customers for a defined period of time after leaving your company.

The key to the enforceability of these provisions, commonly referred to as "restrictive covenants," is to be sure the provisions are narrowly drafted according to state statutes and court decisions to protect your legitimate business interests. Without the protection of a properly drafted restrictive covenant, you risk losing your customers to former employees.

Noncompete agreements

To determine the validity of a noncompete agreement, most states generally apply the following criteria:

• From the employer's standpoint, is the restraint reasonable in that it protects the employer in some legitimate business interest?
  
  
• From the employee's standpoint, is the restraint reasonable in that it is not unduly harsh and oppressive in curtailing legitimate efforts to earn a livelihood?
  
  
• Is the restraint reasonable from the standpoint of sound public policy?

When making these determinations, courts generally use a three-part test of territorial coverage, duration and scope of activity restricted.

The geographic restriction in a noncompete provision must not exceed necessary protection of an employer's business interests. Generally, a reasonable geographic area is considered to be the territory in which the employee performed services for the employer.

A noncompete agreement also must contain reasonable limitations regarding time during which competition is to be restrained. Reasonableness depends on the factual circumstances of each case.

A noncompete agreement also must include reasonable limitations on the scope of activity restrained. In most cases, the restriction should be related to the activities in which the former employee engaged while working for the employer.

If the geographic restriction, time limitation or scope of activities is deemed unreasonable by a judge, jury or arbitrator, the noncompete agreement will not be enforced. Consider the following example.

Cliff Simmons Roofing performed roof system repairs and installations. A nine-year employee terminated his employment with Cliff Simmons Roofing but was bound to a noncompete agreement that prohibited him from competing in the roofing business for one year following termination of employment. The noncompete agreement did not contain a geographic restriction, and it prohibited the employee from accepting employment at a competing company even if the new position would not compete with his former employer.

The employee found new employment in the roof system repair and installation business. Cliff Simmons Roofing sought to prevent the employee from working for the competing company based on the noncompete agreement. Because the noncompete agreement had no geographic boundary, it could be interpreted to mean the employee was barred from working for any roofing company in the U.S., which was deemed too broad and unreasonable. Moreover, because the noncompete agreement restriction on the scope of activities would have prevented the employee from, for example, accepting a job as janitor for a competing roofing company, it also was found too broad and unreasonable. The noncompete agreement was held unenforceable, and the employee was free to work for the competing company.

In contrast, Consolidated Industrial Roofing, Roanoke, Va., found itself in a situation where its job estimator of four years accepted employment with a competing roofing and sheet-metal company. While employed as Consolidated Industrial Roofing's job estimator, the employee traveled throughout southwest Virginia, as well as portions of North Carolina and West Virginia, contacting potential customers and participating in the preparation of job cost estimates. The employee also worked in the office preparing material takeoffs, submittals and pre-installation notices. In addition, he supervised two employees who assisted with sales contacts and job estimates.

Consolidated Industrial Roofing soon discovered its former employee was doing material takeoffs, submittals and pre-installation notices as part of his job duties with his new employer. Consolidated Industrial Roofing sought to prevent the employee from continuing his employment with the competing roofing company based on the noncompete agreement the employee signed.

The noncompete agreement in this case contained a time restriction of two years, which the court found reasonable. The scope of the geographic restriction was within 150 air miles (240 km) of Roanoke, and the scope of the activities to be restricted also was deemed reasonable. Because the restrictions were found reasonable and narrowly drafted to protect the legitimate business interests of Consolidated Industrial Roofing, the noncompete agreement was upheld, and the employee was prevented from working for the competitor.

Nonsolicitation agreements

An enforceable nonsolicitation agreement prohibits former key personnel from contacting or soliciting business from your customers or clients. It is different from a noncompete agreement because a nonsolicitation provision allows former employees to compete against you but prohibits them from contacting those customers with whom they had substantial contact while working for you.

Courts will uphold nonsolicitation provisions if they are limited to those customers with whom the employee had contact as opposed to prohibiting former employees from contacting all your customers and clients, including those with whom the employee never did business. However, your customers can contact your former employees for roofing work. In these situations, the courts are clear in saying a former employee has not solicited the business and is not in breach of a nonsolicitation provision.

Unfair competition

In the absence of a noncompete or nonsolicitation provision, a former employee generally is free to solicit his former employer's customers after resignation. If you find yourself losing customers to a former employee, you can bring a lawsuit alleging unfair competition.

An unfair-competition cause of action requires you to show the former employee's competition is being conducted unfairly and illegally. A former employee may not solicit customers by using his former employer's trade secrets, unfairly capitalizing on his former employer's goodwill or misappropriating confidential information. For example, a common unfair-competition claim involves a former employee taking a copy of a customer list for purposes of contacting those customers to solicit business. In such a situation, you stand a good chance to have a court stop the former employee's solicitation.

For example, Morlife Inc., San Leandro, Calif., successfully argued its employees were unfairly competing against it because they solicited Morlife's clients with Morlife's trade secrets, considered to be business cards accumulated by the employees during their employment with Morlife. Morlife successfully argued the business cards were similar to a customer list with customer-specific information beyond mere identity and, as such, should be treated as a trade secret in a similar manner as a customer list. The court agreed and prohibited the two former employees from conducting business with any Morlife customer solicited through use of the business cards.

Protect yourself

By binding your key employees to a nonsolicitation or noncompete provision, you can protect the investments made in your customer and client relationships. To ensure the nonsolicitation or noncompete provisions you intend to use are enforceable as drafted, you should consult your attorney.

Philip J. Siegel is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.