OFFICIAL PUBLICATION OF THE WEST VIRGINIA BANKERS ASSOCIATION

Pub. 12 2021 Issue 1

protecting-your-most-valuable-assets

Protecting Your Most Valuable Assets: How Employee Noncompetition, Nonsolicitation, and Nondisclosure Agreements Can Be Applied in the Banking Industry

This story appears in the
West Virginia Banker Magazine
Pub. 12 2021 Issue 1

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A bank’s employees, clients, and trade secrets are among the most crucial assets that help keep it profitable. Financial institutions must know the best ways to protect those assets.

Some of the most popular tools for protecting these important resources are employee noncompetition, nonsolicitation, and nondisclosure agreements. Depending on each employee’s role within the company, a financial institution may benefit from having some or all of these agreements in place.

But how do these agreements differ from one another, and how likely are they to be enforced?

Noncompetition agreements are intended to protect an employer’s investment in training and to develop an employee. Of the three types of agreements discussed herein, noncompetition agreements tend to be the most difficult to enforce. In West Virginia, an “anticompetitive covenant” will only be upheld if it is “supported by consideration, ancillary to a lawful contract, and both reasonable and consistent with the public interest.” Although some states consider continued employment sufficient to enforce a noncompetition agreement, West Virginia requires additional consideration, such as some alteration in salary, benefits, or conditions or terms of employment. Notably, however, new employment will typically meet West Virginia’s test for adequate consideration.

In West Virginia, an employee covenant not to compete must be reasonable in time and area limitations. It must be to protect an employer’s business — not to intimidate employees from leaving. Typically, these types of agreements are more effective for officer and executive-level positions but less applicable to roles that do not require highly specialized knowledge or skills.

The key test for whether a noncompetition agreement is enforceable is reasonableness. In particular, courts will consider the employee’s role, the reasonableness of time, geography, and scope limitations and whether the employer can show a legitimate business interest in enforcing the agreement.

The key test for whether a noncompetition agreement is enforceable is reasonableness. In particular, courts will consider the employee’s role, the reasonableness of time, geography, and scope limitations and whether the employer can show a legitimate business interest in enforcing the agreement.

The next type of agreement that employers may use is a nonsolicitation agreement. Whereas a noncompetition agreement restricts the employee from engaging in business similar to that of the employer within a designated time and territory after the employment ceases, a nonsolicitation agreement restricts the employee from soliciting the employer’s customers or making use of the employer’s confidential information. These agreements are generally intended to protect client lists and customer relationships. Because nonsolicitation agreements ordinarily do not include territorial limits, West Virginia courts view these agreements as less restrictive on the employee and less restrictive on the economic marketplace. Accordingly, these agreements tend to be a little easier to enforce. For a nonsolicitation agreement, the agreement to be enforced must protect a legitimate business interest, be reasonable, and not unjustly restrict the employee from engaging in business activity that the employee seeks to pursue.

The final type of agreement that employers commonly use to protect their business interests are nondisclosure agreements. These agreements are intended to protect a business’s confidential information, such as trade secrets, methods of operation, names of customers, price lists, financial information and projections, personnel data and similar information. Notably, to be enforceable, these agreements must prohibit the sharing of only nonpublic information. Information that is publicly available or can be independently developed will not usually meet the threshold.

man-signing-paper

While noncompetition agreements should typically be reserved for specialized employees, nondisclosure agreements should be strongly considered for all levels of employees. As long as an employer can prove that an employee or former employee received confidential information, and as long as the employer makes an effort to keep the information confidential, these agreements are generally enforceable. Where an employer itself publicly releases once-confidential information, it would not be entitled to enforce an employee to keep the same information confidential.

Because nondisclosure agreements are easier to enforce, an employer seeking to use a noncompetition or nonsolicitation agreement should always also use a nondisclosure agreement for the subject employee. That way, even if certain provisions of the agreements cannot be enforced, it is likely that the employer would still be able to protect its confidential information. Furthermore, nondisclosure agreements may be used in conjunction with services offered by a contractor, vendor, or other third parties when confidential or sensitive information is being shared within the contractual relationship’s scope.

In deciding which of these agreements to use with an employee, a financial institution should consider several factors. The financial institution should consider the employee’s role; specifically, the employee’s access to customers and confidential information. A financial institution should also consider the competitive footprint of its region. For some employees, a nondisclosure agreement may be sufficient. However, for other employees, a financial institution may consider utilizing all three forms of restrictive covenants to protect its personnel investments, customer relationships and confidential information.

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