Legal Perspective

Is your start-up considering non-competition agreements?
By Mark Hanson & Todd Guerrero | December 01, 2004
With recent passage of federal tax incentives and continued momentum in this area on a state level, good things are happening in the biodiesel industry. As transactions grow in size and complexity, however, it will be necessary for the industry to "paper up"-that is, to adequately set forth terms and conditions in binding agreements. And for start-up companies especially, it is likely that employment agreements with key employees will be necessary, and likely advantageous, in both attracting capital and in the successful operation of their business.

While the industry will undoubtedly grow during the next decade, it remains relatively small today. During that growth, one issue that is likely to be important in the employment context is the use of non-competition agreements. Similar restrictive covenants can be found in stock option or other incentive plans.

The intent of restrictive covenants is simple: employers want to protect against key employees competing against them after they leave the
company, whether voluntarily or involuntarily. Because post-employment covenants act as a restraint on trade, they are generally disfavored by courts. Indeed, many states prohibit them, or place severe restrictions on them. Generally, restrictive covenants will be enforced only to the extent that they protect legitimate interests of an employer's business, are not unreasonably burdensome for the employee, and are otherwise in the "public interest." Restrictive covenants will almost always be limited in terms of time, geography and activity.

For instance, it is relatively rare to see a restrictive covenant last longer then two years from the date of termination, and generally the specific prohibited territory must be identified (i.e., specific states or regions). In the context of a national sales network, however, it may be reasonable for the restriction to apply across the United States. Many agreements also specifically prohibit the employee from soliciting certain existing customers or accounts, or even potential customers and accounts.

Because restrictive covenants act to restrain a person's right to work, jurisdictions which allow them almost always will require that the employee be given something of value in return for the pledge not to compete. Restrictive covenants signed contemporaneously with new employment are generally enforceable, because the terms of the new job likely provide the necessary consideration. Where a non-competition agreement is entered into during an existing employment relationship, however, a raise, promotion or some other independent consideration will be necessary.

Because courts generally disfavor restrictive covenants, the courts read them very strictly and may disregard the entire provision, even if one aspect of it may be objectionable-such as imposing the restriction for too long before the employee is allowed to compete. Other courts may fashion a remedy by effectively in effect rewriting the covenant entirely to something the court believes to be reasonable. When seeking remedies, employees will almost always prefer to enforce the covenant through an injunction, which locks the employee out of the competing business.

It is inevitable that as the industry matures and the stakes increase, protecting against competition through the use of a non-competition agreement and other restrictive covenants will become as widely used in the biodiesel industry as they are in every other industry.

Mark Hanson and Todd Guerrero are members of the agribusiness and alternative energy practice group of Lindquist & Vennum PLLP, a leading provider of legal assistance on bioenergy projects throughout the country. Ansis V. Viksnins, a firm partner who focuses on business litigation, also contributed to this article. They can be reached at (612) 371-3211.
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