Review These Sections of Your Employment Agreement Before Breaking Away

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If you’re reading this article, my working assumption is that at some point in your life you’ve been employed by somebody other than yourself. Odds are you’re working for somebody else at this very moment, perhaps even plotting the day you jump ship and join a competitor or set out on your own.

Or perhaps you’re on the other side of the credenza and want to protect your firm from employees that defect with more than their fern and their framed family picture in their take-home banker’s box on their last day. The point is that both employee and employer should understand a few key covenants that are typically signed as part of an employment contract.

Non-Compete

The latitude afforded to non-competition agreements is a matter of state law, which means that the restrictions that can be imposed on departing employees varies widely depending on the state of employment. California infamously detests non-competes, for example, and generally renders them unenforceable unless they arise as part of the sale or dissolution of a business. These are specific statutory exceptions to the general rule.

The logic is that non-competes restrict an individual’s ability to make a living and restricts healthy competition.

Other states are more permissive with respect to non-competes, and recognize that employers have a legitimate interest in protecting their confidential information, trade secrets, intellectual property, etc. from competition. Even still, non-competes must impose only reasonable restrictions in terms of scope, duration and market, and must generally restrict departing employees only to the extent necessary to protect legitimate employer interests.

A non-compete that unduly restricts trade or livelihood likely wouldn’t be enforceable anywhere.

Carefully review non-compete covenants to understand the restrictions imposed, how long they are imposed for and in what geographic region. Enforceability is fact- and state-specific, but the permissible duration of a restriction may reasonably be longer for more senior-level employees or those in possession of highly sensitive employer information. Anything more than two to three years will be scrutinized more closely (unless you’re employed in California or any other similar state, which renders almost all non-compete restrictions unenforceable).

Non-Solicit 

Non-solicitation agreements are intended to restrict a departing employee from soliciting the employer’s clients and/or other employees, and like non-competes are largely determined by state law. Also like non-competes, non-solicits must be reasonable in scope and duration if they are to be enforced. Again, California stands out for its skepticism of non-solicits and views them as anti-competitive.

There are a few more levers to pull in a non-solicit. For example, query whether your non-solicit applies only to current clients or whether it also encompasses prospects. Maybe it doesn’t apply to your separate book of business, maybe it does. Or perhaps only certain communications may be sent to a subset of clients within a definite timeframe by a limited number of mediums using only specified contact information.

Determining if and how former clients or co-workers can be asked to follow you to another firm can make a huge difference when drawing up the financial model and business plan post-breakaway.

Confidentiality / Trade Secrets 

Confidentiality or non-disclosure agreements are – yet again – matters of state law and require a case-by-case factual analysis. But generally speaking, they are not as controversial as non-competes and non-solicits. Employers have employees sign confidentiality agreements for obvious reasons: to protect sensitive, proprietary, and economically valuable information that is the lifeblood of a successful business’ existence.

A basic confidentiality agreement should define what is considered confidential, explain how and why it is to remain confidential, carve out a few exceptions that necessitate disclosure, and – importantly for this article – how long confidentiality obligations apply.

The duration of confidentiality obligations post employment can be as short as a few years or as long as… forever (i.e., the agreement is silent with respect to when confidentiality obligations end). An indefinite confidentiality agreement is not per se unenforceable, but a court would be within its right to assess duration if the overall agreement is in question or the confidential information in question is not a trade secret.

A trade secret can be thought of as extra-special confidential information. That is, a trade secret is afforded more protection because it derives its value from its secrecy and is highly coveted and protected by its owner. Think of the recipe for Coca-Cola as the ultimate example of a trade secret: both highly valuable to the Coke brand and highly protected by Coke as its owner. But many advisory firms also have trade secrets as well, albeit on a less dramatic scale than Coke, and would be inclined to litigate if they see their proprietary methods, techniques or processes used by a former employee at a competitor.

Can a client list be considered a trade secret? It depends, but in the context of an advisory business that spends significant time and resources gaining clients, takes reasonable steps to protect the personally identifiable information of those clients (pursuant to Reg S-P or otherwise) and would suffer potentially severe economic consequences if a client list became available to a competitor or the public, I would proffer that it is.

Don’t assume that your former employer’s methods, techniques, processes or client lists aren’t confidential or trade secrets; odds are the employer will have a very different assumption.

Non-Disparagement Clause

A non-disparagement clause, if included as part of an employment contract, is pretty straightforward: don’t say or publish anything nasty about your former employer after you’ve parted ways (social media included). Doing so may trigger a breach of contract claim and burn bridges that can’t be rebuilt.

In Conclusion . . .

Conspicuously absent from the above discussion is the Broker Protocol, which governs reps moving between member firms and the client information they may and may not use before, during, and after the transition process. It only applies to signatories of the Protocol and frankly could be a standalone article in its own right. Suffice to say the application of the Protocol creates another minefield altogether, albeit one that may be easier to navigate.

I generally have refrained from advocating the retention of competent legal counsel in my articles, but this time will be an exception. There has been no shortage of litigation in this space, and one misstep can bring disastrous consequences for both the departing advisor and the new firm.

This article is general in nature and not state specific, but will hopefully highlight some of the key documents to review when contemplating a move. In summary, look before you leap.

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This article originally appeared on January 28, 2016 in ThinkAdvisor.