COVENANT NOT TO COMPETE

A deal's a deal ― new Idaho noncompete law

In recent years, the Idaho Supreme Court has gradually limited the enforceability of noncompete agreements between employers and employees. Idaho courts have consistently said that these agreements aren't favored and any ambiguities will be interpreted in favor of the employee. In response to those court decisions, the Idaho Legislature passed a new law (Idaho Code Sections 44-2701 through 44-2704) this last session that went into effect July 1. The law sets out the requirements for an enforceable noncompete and takes some burdens off employers that have to file lawsuits to prohibit former employees from violating noncompete agreements.

A noncompete agreement generally prohibits an employee from working for a direct competitor of the employer for a certain period of time after leaving employment. The new law provides that noncompete agreements between employers and "key employees" or key independent contractors will be enforceable if they protect a legitimate business interest of the employer, are reasonable in duration, geographical area, and type of employment, and don't impose a greater restraint than necessary to protect the employer's legitimate business interests.

Who is 'key' to your business?

The new law defines key employees and independent contractors as those who have gained a high level of inside knowledge, influence, credibility, notoriety, fame, reputation, or public persona because of the employer's investment of time, money, trust, exposure to the public or technologies, intellectual property, business plans, business processes and methods of operation, customers, vendors, or other business relationships during the course of employment. The law presumes that an employee or independent contractor is key if she is among the highest-paid five percent of the employees or independent contractors. Others, however, may still meet the definition.

What constitutes 'legitimate business interest'?

A legitimate business interest includes an employer's goodwill, intellectual property, business plans, business processes and methods of operation, customers, customer lists, customer contacts, and referral sources, vendors and vendor contacts, financial and marketing information, and trade secrets. The law indicates that other employer interests also may be worthy of protection, even if not specifically listed.

What kind of restrictions can be imposed?

Valid noncompete agreements can prohibit the key employee or independent contractor from taking another job in a line of business that is in direct competition with the former employer's business. The agreement becomes effective as of the date the employee is terminated, regardless of whether she is fired or resigns.

Restrictions on the employee's direct competition will be enforced if reasonable in regard to duration, geographical area, and type of employment or line of business. An agreement will be presumed reasonable if its term restricts the former employee for a period of 18 months or less, is limited to the geographic areas in which she provided services or had a significant influence, and is limited to the type of employment or line of business she conducted while working for the employer.

Those presumptions operate in favor of the employer if it's forced to file suit to enforce the agreement. Before this law's passage, the burden was on the employer to establish the reasonableness of the agreement. Now, however, if the agreement contains terms that make it presumably reasonable, the employee has the burden of showing that its terms are unreasonable.

Courts must try to enforce valid agreements

The law also instructs courts to make every effort to enforce noncompete agreements, even if they initially find some terms unreasonable. The new law requires courts to limit or modify the agreement as necessary to make it reasonable and reflect the intent of the employer and employee at the time they entered into it.

Things to consider

Here are some things to keep in mind when drafting noncompete agreements:

• Although the law presumes an employee is key if she is among the highest-paid five percent, salary isn't the only factor in determining who is key. Any employee who has gained significant inside knowledge of your operations, close relationships with your clients, or confidential knowledge concerning your operations can be considered key, regardless of the salary earned.
• The law's list of legitimate business interests isn't all-inclusive. While the interest must be something unique to your business operation, a legitimate business interest can be anything a former employee could use when working with one of your direct competitors to exploit and compete against your business.
• Make sure the duration, geographical limitation and type of employment terms in your agreement meet the law's requirements for when an agreement will be presumed reasonable. Having that presumption in your favor will put the legal burden on your former employee to show that the terms are unreasonable.
• Finally, review existing noncompete agreements to determine whether they should be amended or whether entirely new agreements should be prepared. Consult an attorney if that needs to be done.