Protecting Intellectual Property with Contracts: Confidentiality and Non-Compete Clauses in Employment and Independent Contractor Agreements (Part III)

In the past sections of this series, we laid out a general overview of how contracts can be used to protect your business’s intellectual property and covered non-disclosure agreements (NDAs) and trade secret law. Here, we will discuss confidentiality and non-compete clauses in the context of employment contracts. Confidentiality and non-compete clauses are important parts of an employment or independent contractor agreement and are a popular way of protecting a business’s ongoing interests. However, business owners should take care to avoid certain pitfalls when choosing these clauses.

Confidentiality clauses contain similar provisions as NDAs, such as rules for how the information being disclosed to employees or independent contractors can be used and shared. Non-compete clauses work by preventing employees or independent contractors from competing with the employer’s business in a given geographic area for a set period of time.

While these clauses can be very helpful for business owners, there are certain legal nuances you should be aware of to ensure that a non-compete clause is valid. For example, how courts treat non-compete clauses in agreements between employers and independent contractors is different than how courts treat these clauses when they are between an employer and employee. This distinction is important, so we will expand on the differences below starting with independent contractor agreements.

Non-Compete Agreements and Independent Contractors

A non-compete clause is typically used to prevent independent contractors from competing with the employer by working in the same field or for a competing business during the term of the contracting agreement. Although non-competes are often beneficial for an employer, if the terms unreasonably hinder the independent contractor’s ability to support themselves through their work, then these agreements may be found unreasonable and unenforceable in many states. Another potential problem with using a non-compete clause in an independent contractor agreement is that doing so can lead to an independent contractor being reclassified as an employee, which can lead to potentially unforeseen liabilities for employers.

Because of such risks, employers seeking to work with independent contractors may choose to use a confidentiality clause in the agreement. For more on confidentiality clauses, please read part two of this blog post series here. (https://www.bcrfirm.com/articles/protecting-intellectual-property-with-contracts-non-disclosure-agreements-confidentiality-agreements-and-non-compete-agreements-part-ii) 

Non-Compete Agreements and Employees

A non-compete clause is generally more likely to be enforceable when it is part of a contract between an employer and an employee. However, a non-compete clause between an employer and employee must still be reasonable. Whether one of these clauses is reasonable depends on a few factors, such as the time period of the restriction, the geographic area of the restriction, and whether the scope of the restriction is greater than necessary to protect the employer’s business interests. More specifically, such as in Virginia, non-compete agreements:

1. must be no more restrictive than necessary to protect the employer’s legitimate business interest, 
2. must not be excessively severe or oppressive in restricting the employee’s ability to obtain another job, and 
3. must not violate a “clear mandate of Virginia public policy.”

As a final note, it is important to be careful in drafting the entire non-compete agreement in order to stay compliant with state law. Under Virginia law, for example, if any single portion of a non-compete agreement is found to be unenforceable, the entire clause will be held invalid, generally referred to as the state having no “blue pencil rule.” For example, an agreement’s statement such as this: “An employee cannot work for a competitor within one year of leaving,” can invalidate the agreement because the restrictive period of six months was not set. These considerations are fact-specific and require thoughtful planning to ensure the agreement is enforceable.

Conclusion

Special care should be taken both in determining whether to use non-compete and confidentiality clauses to protect your business and in drafting these clauses if you choose to do so. If you would like to prepare an employment contract with non-compete or confidentiality clauses or have any questions about using these for your business, please feel free to schedule your initial consultation using the link below!