Oklahoma non-compete

From Flickr user Alan Levine

If you have read my blog even a little bit, you are probably aware that pure non-compete agreements are not allowed by Oklahoma except in two limited situations (see this post for the exceptions).

A pure non-compete is one that restricts an employee from working in their chosen field or industry.

While Oklahoma has decided it will generally not do non-competes, it doesn’t ignore the legitimate needs of Oklahoma employers to protect their companies. Oklahoma law provides employers several mechanisms to request employees to agree to reasonable limits on how they can use what they learn and see when they move on to a new employer.  These are tools all Oklahoma employers need to utilize as reasonable, value-protecting methods to protect what makes a company unique and provides an advantage over the competitions:

Non-Solicitation of Customers
A non-solicitation restriction is indeed what it sounds like – a promise by an employee to not solicit the employer’s established customers after the employee leaves employment and either joins a competing company or starts the employee’s own competing company. A non-solicitation restriction in an employment contract would look something like this:

7.2 For a period of one (1) year after cessation of Employee’s employment with Company, Employee shall not directlyy solicit any of the established accounts, clients, or contractors of Company.

Oklahoma law typically requires the time period for the non-solicitation restriction to be “reasonable” a term that has interpreted by Oklahoma courts to run somewhere between 1 and 3 years.

Non-Solicitation of Employees
While the non-solicitation restriction discussed above relates to customers, there is also another non-solicitation restriction that relates to employees. Customers are the lifeblood of a business and employees are a component of operating a business that serves customers well, convincing customers to stay customers.

When an employee departs either to a new employer or starts her own company, there is usually a temptation to ask other employees to join her. There is nothing mysterious or sinister about this – people find other people to work with through relationships. The former employee often finds people to hire by talking to people she used to work with.

While this is natural, Oklahoma law allows an employer to ask an employee to agree to not use those relationships with other employees to take the employees away from the employer. This is accomplished with a non-solicitation of employees restriction that often reads like this:

7.1 For a period of one (1) year after cessation of Employee’s employment with Company, Employee shall not directly or indirectly solicit the employment of, or hire any person employed by Company as of the cessation of Employee’s employment with Company, or cause any person employed by Company to terminate such employee’s relationship with Company without the prior written approval of Company.

From Flickr User Kim Siever

Non-Disclosure of Information
Again, Oklahoma’s non-disclosure restrictions (sometimes confusingly referred to as “confidentiality”) is what it purports to be: A restriction that prevents a former employee from sharing the private and proprietary information of the former employer.

Non-disclosure provisions are a critical component in an employment agreement because the non-disclosure provision establishes that the employer has a basic expectation that its private business information must be protected. Non-disclosure restrictions typically look something like the blurb below:

6.1 Confidential Information. “Confidential Information” means proprietary business information, Trade secrets and/or confidential Information regarding the business of Company or its clients. The confidential information is to include Company’s legal, financial, methods of operations, software developments, submission and proposal procedures, client lists, or any other information pertaining to the business of Company. Employee acknowledges and agrees that the business and good will of Company depends upon the protection of any adherence to the keeping of Confidential information confidential.

6.2 Non-Disclosure. Except when directed in writing to do otherwise by Company, and except as required by law, court order, or subpoena, Employee shall keep confidential and shall not divulge to any other person or entity, during the time of the agreement any confidential information. In any case where Employee is compelled by law, court order, or subpoena to disclose any confidential information to a third party, Employee shall advise Company in advance of such requirement and shall permit Company to object, contest, intervene, and/or obtain appropriate protection of such information prior to disclosure to any person unless commanded by law officials or advised against doing so by legal counsel representing Employee.

The Takeaway for Employers

The takeaway is, Oklahoma employers, know the legitimate legal tools you can use to protect your business when employees leave and use them.

Postscript

When I first considered this blog post I thought it might be titled “How an Oklahoma employer can weaponize to protect itself from departing employees”. However, those words do not convey the intent of this post. My intent is to share some mechanisms employers can use to protect their business from employees who might choose to not compete fairly after leaving.

The phrase “Oklahoma non-compete” is thrown around quite often, indeed it is a popular Google search term.  Yet “non-compete” is often used to describe 4-5 separate employee restrictions without specifying whether it is intended to include all of or even any of the component parts of the phrase.

Pure Non-Compete

There is the pure non-compete which prevents an employee from working in the industry. The pure non-compete, as I discussed in this blog post, is typically unenforceable under Oklahoma law.

Employee shall not, within a radius of fifty (50) miles from anywhere that Employer maintains an office or facility from which Employer’s business is then-conducted, serve as an incorporator, director, officer, partner, employee, manager, consultant, agent, independent contractor, advisor, stockholder or otherwise, or directly or indirectly own an interest in, provide any financing for, or perform any services for himself herself, or on behalf of any person, business, corporation, partnership~ entity or organization that directly or indirectly engages in competition with. the Business engaged in by Employer.

Non-Solicitation – employees & contractors

The Employee agrees and covenants not to directly or indirectly solicit, hire, recruit, or attempt to hire or recruit, any employee or contractor of the Company or any employee who has been employed by the Company in the 24 months preceding the last day of Employee’s employment (“Covered Employee”), or induce the termination of employment of any employee of the Company.

Non-solicitation – customers

Non-disclosure

Except when directed in writing to do otherwise by EMPLOYER, and except as required by law, court order, or subpoena, EMPLOYEE shall keep confidential and shall not divulge to any other person or entity, during the time of the Agreement any Confidential Information.  In any case where EMPLOYEE is compelled by law, court order, or subpoena to disclose any Confidential Information to a third party, EMPLOYEE shall advise EMPLOYER in advance of such requirement and shall permit EMPLOYER to object, contest, intervene, and/or obtain appropriate protection of such information prior to disclosure to any person unless commanded by law officials or advised against doing so by legal counsel representing EMPLOYEE.

Have you wondered if there is an easier path to begin the analysis of an Oklahoma non-compete agreement?  If so, you are in luck.

I have written extensively about Oklahoma non-compete agreements, non-solicitation agreements, non-disclosure agreements and related competition documents. Recently, it ocurred to me that there is a better to explain how Oklahoma competition law fits together.

Oklahoma public policy is decisively against non-compete agreements . . . that limit employees.  This directly in contrast to a couple of other areas where Oklahoma public policy expressly allows non-compete agreements.  Those areas are when partners make an agreement about how to handle the break-up of a partnership and if the goodwill of a business is sold.

Determining whether you fit into to the first or second scenario is about 99% of the battle in determining whether the non-compete restriction will be enforceable.  To best understand Oklahoma competition law, think of an analysis moving across two tracks:

1.  Were you an employee when you signed the restrictive agreement?
2. Were you an owner of a business when you signed the written agreement?

The answer to these questions determines your track.  If you are on tract 1, consider this post for some additional guidance.  If you are on track 2, consider this post for additional guidance.

Oklahoma non-compete law in the employment setting remains crystal clear: Non-competes are unenforeceable except in a couple of narrowly defined circumstances. That doesn’t mean some people won’t continue to try to accomplish indirectly what cannot be done directly.

This is where the back-door non compete comes in. What is a back-door noncompete?

It is a contract clause that despite not expressly limiting the former employee from working, effectively creates a market so small, it is like being prohibited from competing. Consider this example:

Employee covenants and agrees that during the period of time while employed by SMITH CO, and for a period of two years after the date of termination of such employment, whether voluntarily or involuntarily, with or without cause, the Employee shall not directly or indirectly render widget-making services of any type, including, but not limited to, traditional and Internet, to any person or entity, that during the 24-month period
immediately prior to Employee’s termination of employment with SMITH CO:

 

1. SMITH CO provided any services to such person or entity;
2. SMITH CO offered to provide any services to such person or entity; and/or
3.  Such person or entity requested SMITH CO to pitch or bid to provide any services.

Notice of a couple of things:

➜at first glance while the former employee is limited from providing certain services, the limitation appears to be itself limited.
➜however, the limitation is written so broadly that it could apply to nearly every customer or potential customer the former employee would encounter.
➜while the employee can open a business, she simply can’t talk with most of the universe of customers that might be natural prospects.

This is the back-door non-compete. Beware.

Have you ever wondered what the Oklahoma Statutes would look like in a picture? You will find the answer below.

Sometimes it is easier to visualize rather than read complicated but interrelated topics. This concept even applies with the Oklahoma Statutes that cover Oklahoma non-compete law.

There are several statutes that make up Oklahoma non-compete law and they are laid out below in this handy diagram.

Its one thing for an employee to have reasonable post-employment restrictions in an employment agreement, but this clause exceeds even the most zealous restrictions I have seen.

This clause arises out of the securities industry which from my experience is notoriously thorough and probing in areas such as competition.

6. No Interference with Business.
(a) The Employee hereby agrees that from the date hereof and for a period of twelve (12) months after the termination or expiration of the Employee’s services hereunder, however occurring (the “Restricted Period”), the Employee will not (other than as an Employee of the Company and on the behalf of the Company and its Affiliates), in any manner or capacity, directly or indirectly, through or on behalf of an Affiliate (as defined above) or otherwise, (i) render any Financial Services or any other service rendered by an of the Companies (the “Competing Services”) to any present or prospective client or customer of any of the Companies, (ii) interfere with the services of any of the Companies to any of their clients, including clients introduced by the Employee to any of the Companies, (iii) solicit, induce, influence or have any other business contact with any present or prospective client or customer of any of the Companies, or (iv) induce any client of any of the Companies, to terminate or modify and/or consider terminating and/or modifying his/her/their/its relationship with any of the Companies. For the purposes of this Agreement: (i) a “prospective client” or “prospective customer” shall be one that had been specifically identified during the term of this Agreement as a prospective client or customer and in respect of whom or which the Company or any of its Affiliates had undertaken some demonstrable initiative towards being retained to render Competing Services; and (ii) a “client” or “customer” shall be one who has purchased or received or has entered into an agreement to purchase or receive for himself, itself or others, any of the Competing Services from any of the Companies at any time during the twelve (12) month period immediately preceding the termination or expiration of the Employee’s services hereunder. Notwithstanding anything to the contrary in this Agreement or otherwise and with the exception of any and all previous and/or existing clients of Employee as set forth on the attached Exhibit E, regardless of whether services are performed through any of the Company’s Affiliates any and all clients serviced by the Employee pursuant to this Agreement shall be considered clients of the Company.
(b) The Employee further agrees that during the Restricted Period, the Employee will not directly or indirectly, communicate, reveal, disclose to anyone, or use or otherwise exploit for the Employee’s own benefit or for the benefit of anyone else, the terms of this Agreement, including without limitation, the compensation paid to the Employee hereunder and the other provisions of this Agreement. In the event Employee is no longer employed by Company, the Company will be agreeable to disclosing such information to potential employers related to salary and production information upon the request from Employee.
(c) The Employee hereby further agrees during the Restricted Period, the Employee will not in any manner or capacity directly or indirectly (through or on behalf of an Affiliate or otherwise) employ any employees or agents of any of the Companies to discontinue such employment or agency or other relationship with any of the Companies unless any of the Companies terminates any such employee(s) or agent(s) and grants the Employee prior written authorization to employ such employee(s) or agent(s).
(d) The parties acknowledge that rendering Financial Services can involve, as to certain clients or customers, close personal relationships and that it is not unforeseeable that upon a termination of the Employee’s services hereunder some clients or customers may on their own initiative elect to discontinue the relationship with any of the Companies and seek to continue a relationship with the Employee. The parties also acknowledge that it is not in either parties’ interest to have a client or customer of any of the Companies discontinue its relationship with any of the Companies because of the departure of the Employee AND have the Employee be precluded by the terms of Section 6(a) from continuing a relationship with such client or customer insofar as such result would amount to a loss by both parties. Therefore, the parties agree that in any case where (i) a client or customer of any of the Companies terminates its relationship with any of the Companies (a “Former Client”), (ii) such termination has not been encouraged, solicited, or induced by the Employee in violation of his undertakings under Section 6(a), and (iii) the Former Client retains the Employee, an Affiliate of Employee or any other company, partnership, firm, association, person or other business with which the Employee and/or any of the Employee’s Affiliates has an agreement relating in any way to Financial Services (a “Successor Advisor”), to render Financial Services, then the Employee agrees to pay to the Company (or its applicable financial services Affiliate) the fees and/or commissions payable or earned by the Former Client to the Employee and/or the Successor Advisor with respect to Financial Services rendered during the first twelve (12) months after the Employee and/or Successor Advisor is retained by the Former Client. Notwithstanding anything to the contrary in this Agreement or otherwise and with exception of any and all previous and/or existing clients of employee as set forth on the attached Exhibit E, regardless of whether services are performed through any of the Company’s Affiliates, any and all clients serviced by the Employee pursuant to this Agreement shall be considered clients of the Company. By execution of this Agreement, the Employee agrees that this provision shall be binding on any Successor Advisor. Finally, the parties acknowledge and agree that it can be difficult to ascertain the circumstances of a client’s departure and the damages Company might suffer. Therefore, the parties stipulate and agree that the provisions of this Section 6(d) are reasonably calculated to compensate the Company for losses it might sustain under these circumstances and that any such payment shall constitute liquidated damages and not a penalty. The Employee agrees that during the Restricted Period it shall permit the Company to review the Employee’s books and records, and those of any Successor Advisor, relating to the identity of his or its clients and customers in order to enable Company to assure itself of the due performance by the Employee of his obligations under this Section 6. The Company agrees that it shall exercise its rights hereunder at reasonable times during regular business hours and in a manner which does not unreasonably interfere with the conduct of the Employee’s subsequent activities, to the extent properly conducted by the Employee under this Section 6, or those of the Successor Advisor. Any persistent refusal to allow such review shall suspend the Employee’s rights to perform Financial Services for a Former Client (but not the Company’s rights to recover damages on account thereof).