Even though the economy has stabilized, American Recovery and Reinvestment Act (stimulus) money continues to flow into expanding and start up businesses. Now is the time to protect your fledgling business from competitors who will not hesitate to take your innovations, ideas and employees with impunity or to sue you for taking theirs. Common rationalizations are based on the perception that because the business is not “first in the field” or “big enough,” finances don’t justify a trademark, patent, Web site protection or a non-competition agreement. Think about the social media networks that came before Twitter and Facebook. Think about the auction sites before eBay, the search engines before Google. You remember these later companies and not their predecessors because these later companies protected themselves from the outset. (I cannot name the earlier companies because I don’t know their names.)

This post concentrates on the threat from within. Trade secrets may be taken by a thief in the night, by a hacker, or by an employee who walks across the [virtual] street with your processes, client lists, templates (and even other employees). If you wait too long, you risk losing everything. The person stealing your company out from under you need not be a stranger. It may be an executive employee or partner. As emphasized in an earlier post, putting your relationship into a written contract is a sign of trust, not mistrust. Your business is more than a lark – it has its own identity. Take selfless steps to protect that distinction. Stand behind your commitments and clearly define your expectations. Writing is friendly. Writing drastically reduces the likelihood of fisticuffs down the road.

A non-compete agreement may provide everyone with assurance as to expectations and may address a wide range of issues including:

- For whom a current employee/partner may work in the future.

- The time limit for that restriction.

- The penalty for breaking the agreement.

- Trade secrets that are protected under the agreement.

- Which state’s law applies to a dispute. [1]

- The type of work for which the non-compete applies.

- The type of industry to which the non-compete applies.

- Distance from original business within which the non-compete applies.

An unfair or ill-conceived non-compete agreement may be modified or ignored by the court. Therefore, your agreement should not contain:

- Restrictions that last until the employee is greeting customers at Wal-Mart. Many states strike provisions which are unreasonable in duration.

- Restrictions which prevent the employee from ever touching a computer again. Restrictions need a reasonable underlying justification to be enforceable.

- Provisions that restrict the employee from ever competing anywhere but Latvia. Geographic restrictions in the agreement must be reasonable.

For employers, my next blog post will explore two additional possible provisions: 1. A non-solicitation agreement with other companies to inhibit the ability to lure away employees. 2. A non-disclosure agreement to provide protection from the leak of proprietary information that an employee may release to a third party without leaving your employment.

The door swings both ways. If you hire employees with prior industry experience, inquire about the existence of a non-compete or nondisclosure agreement. In some circumstances these may impose liability on an employer. Often the best workers already know the business and enhance your business with their knowledge. Ask yourself, how did they get to be so good?

Finally, if you already hired your employees before you read this article, offer them something extra for signing the non-compete agreement. Some courts do not recognize non-compete agreements if there is no additional “consideration” offered to the employee to sign a non-compete after employment has begun.

-Christine Branstad

[1] In California, non-compete clauses are not enforceable based on the premise that non-competes prevent the movement of talent from company to company; such movement promotes a healthy business environment.

My posts deal with avoiding litigation. My last post addressed the benefit of putting business dealings in writing. Once you put something in writing, the next logical determination is how long to save that document.

Business owners regularly tell me they keep records for seven years because it is “the law.” The magic seven-year rule may be a tax guideline, but it is a business and legal myth.

Prior to going Enron on your corporate records, take a look at the IRS’s Starting a Business and Keeping Records. The Record-keeping section addresses records for taxes. To address concern about potential lawsuits, work with your attorney to design a record retention plan. Be sure the plan covers paper records and electronic data. Once you have a record retention (and destruction) plan, integrate that plan into your business processes.

What if you don’t follow the plan?

Under Iowa law [Iowa Civil Jury Instructions contain a model instruction] if a jury concludes you intentionally destroyed or failed to produce evidence, it can assume that evidence would have been unfavorable to you. The jury may see the missing evidence as the :”smoking gun.” A saved receipt may nail your case down; a prematurely destroyed receipt may become a nail in the coffin. Well kept records may be more productive than winning lawsuits; they may convince opposing parties not to sue you in the first place.

How do you devise and regularly apply a sound plan to avoid problems?

In Iowa, most oral contracts have a five-year statute of limitations [section 614.1] to enforce a contract (or to be sued for a breach). Depending on your business, you may wish to retain supporting documents for five years after the contract ends.

In Iowa, most written contracts have a 10-year statute of limitations [section 614.1]. Does your record retention plan keep the contract for 10 years after performance of the contract ends? How long do you keep record of payments made or received? Should you keep emails about the contract?

Under Iowa law, as a designer, manufacturer, distributor or seller of a product, can you be sued 10 or 20 years after production and multiple re-sales if the product causes damage? What are the time limits or Statutes of Repose [614.1(2A)] for such claims? What if your product is a Web-based application? How long must you keep the records of product testing? Of use? Was your product sold with warnings or safety devices, or for a Web-based application, was a warning included with installation or initialization? Do you have records that show your product was altered?

Although the questions are complex, setting consistent policy will make later involvement in litigation less likely or, at least, less painful.

Record retention is important. Failure can subject you to legal presumptions that could end your business. Find out the factors that affect your particular business. Implement a record retention and destruction policy. Put it in writing. Stick to it.

Or wait until you have a problem. Then come see me.