Back to the Basics... Terms of Art
Sometimes as a discussion progresses, the details become obscured or lost altogether. The discussions about noncompete agreements are no exception. So, below are some definitions with which people should be familiar:
Common Types of Agreements:
- Restrictive covenant: An agreement that limits a party's ability to perform similar work. Generally, people think of the limits as applying after the parties' relationship ends, but typically the restrictions apply during the term of the contract as well. (The reason for the post-contract focus is that the parties' interests are more likely to diverge at that point.)
- Noncompete agreement (also known as "noncompetition agreements"): A type of restrictive covenant in which the applicable limitation precludes a party from providing services to a competitor of the other party. These agreements can arise in many contexts (sale of a business, independent contractor agreements, partnerships, etc.), but most often arise in the employment context. (Those that arise in the employment context are commonly referred to as "employee noncompete agreements.")
- Garden leave clause: a type of employee noncompete agreement for which the employer compensates the employee while the employee is restricted from competitive activities. There are two types: one in which employment continues during the restricted period (essentially the employee is required to provide a minimum amount of notice of resignation); one in which the employment terminates and the restrictive period begins. For more on the garden leave clause, see Christi Adams' post, Garden Leaves.
- Forfeiture-for-competition agreement: a form of employee noncompete agreement by which an employee forfeits certain benefits if he engages in activities that are competitive with his former employer.
- Compensation-for-competition agreement: a form of employee noncompete agreement by which an employee pays his former employer (sometimes a percentage of the revenues from the competitive activities) if he engages in activities that are competitive with his former employer. (This agreement can be viewed as a form of forfeiture-for-competition agreement, insofar as the employee forfeits some of the compensation for competitive activities.)
- Forfeiture agreement: an agreement by which an employee forfeits benefits when his employment terminates - regardless of whether he engages in competitive activities.
- Nondisclosure/confidentiality agreement: an agreement by which an employee agrees not to use or disclose an employer's confidential information.
- Nonsolicitation agreement: an greement by which an employee agrees not to solicit - and, if well drafted, not to accept - business from the employer's customers.
- Antipiracy agreement: an agreement by which an employee agrees not to solicit - and, if well drafted, not to hire - the employer's employees.
- No-hire agreement: a type of antipiracy agreement by which a party agrees not to hire the other party's employees.
- Invention assignment agreement: an agreement by which an employee assigns to the employer any potential inventions conceived of during employment. (Typically, the inventions are only those that somehow relate to the work of the employer.)
For more information on these agreements, see, Beyond the noncompete.
Terms:
- Blue pencil: A process by which a court reviewing an agreement deletes the offending language (literally crossing it out, with no new language written in). The court then enforces the re-written agreement if - but only if - the agreement still makes sense with such language omitted, enforces the balance of the contract as written.
- Red pencil: A process by which a court reviews an agreement and, if the agreement purports to be more restrictive than necessary, deems the agreement unenforceable in its entirety, regardless of whether it is capable of being narrowed.
- Reformation: A process by which a court rewrites aspects of an agreement in an effort to give effect to the parties' intent while avoiding wholesale rewriting of the agreed-upon restrictions based solely on the court's judgment.
- Legitimate business interests: Those aspects of a company's business that it may protect through noncompete agreements. Although they vary, most states recognize trade secrets, confidential information, and goodwill as legitimate business interests. Some recognize other things as well, including, for example, special skills and training. General skills and knowledge, however, are not legitimate business interests.
- Goodwill: Those aspects of a company's business that tend to enable it to retain its patronage, including, for example, the company's name, location and reputation.
- Confidential information: As its name suggests, it is any information that a company keeps secret. It need not rise to the level of a trade secret (see below), although the distinction is subtle and frequently ignored.
- Trade secret: There are many definitions of trade secrets, including statutory and judge made definitions. The salient point, however, is that it is a type of confidential information that gives a company a competitive advantage. The classic example is the secret recipe for Coca-Cola.
- Inevitable disclosure doctrine: A judge made rule that allows a court to prevent a former employee from working for a competitor (where the employee is not otherwise restricted by a noncompete agreement) if the court finds that the employment would inevitably lead to a disclosure of the trade secret.