Covenants to not compete, or "non-competes," are becoming more widespread in nearly every type of business, but they are especially common in high-tech and Internet-based companies. Adult Internet businesses are no exception. After spending significant amounts of time developing brand identity, software, marketing plans and traffic-growth strategies, adult website operators and content providers don't want to see everything they have built be handed over to the competition by ex-employees.
The key to the successful use of non-competes is planning ahead. In some cases, having a bad non-compete can be worse than having no non-compete at all - like paying tens of thousands of dollars in legal fees, only to find out that your agreement is worthless. Spending time answering some fundamental questions can significantly improve your end results in using and enforcing non-competes.
What state(s) do you care about?
Covenants to not compete are governed by state law, and the laws of the states vary widely. Most states allow non-competes in at least some circumstances, but they usually have very specific requirements. To make matters more complicated, many courts will only enforce out-of-state non-competes that meet the requirements of their state, even if they were completely enforceable in the state where they were signed.
Employers who want to maximize their chances of benefiting from a non-compete will not only comply with their home state's requirements, but also identify the states where ex-employees are likely to relocate and try to comply with those states' rules.
What are you trying to protect?
The enforceability of a non-compete usually depends on whether the employer is trying to protect an important business interest. As a result, covenants to not compete are most effective when they relate to ex-employees who had access to secret information or plans, were closely affiliated with the employer's business identity or will otherwise have some type of unfair competitive advantage after leaving the company.
Being able to identify the special business interest that you are trying to protect and show other measures - outside of non-competes - that you have taken to protect that interest can significantly improve the enforceability of your non-competes.
Will ex-employees still be able to earn a living?
Because the Internet allows a large amount of freedom in choosing business locations, Internet employers often want their non-competes to cover very broad areas - like the entire United States - for protection from their competitors. Most judges, however, aren't willing to tell a former employee that he or she must move out of the country to find a new job.
In some states, a judge can limit the scope of the non-compete to make it "reasonable." In other states, if a judge thinks the scope is unreasonable, the non-compete will not be enforceable at all.
A good compromise is for an employer to narrowly define "competition," only covering the market niche that is most likely to contain competitors who could be a problem. A non-compete with a broad geographic scope seems less burdensome when ex-employees can still find work by switching to a different niche or market segment.
How much are you willing to pay?
Going to court to enforce a non-compete is shorter and more intense than regular litigation - and has a higher upfront cost - because the battle usually is won or lost in the first two or three months when the court decides whether to issue a temporary injunction against the ex-employee.
The higher short-term cost of the litigation usually works to the employer's advantage because most employees can't afford to pay $10,000-20,000 just to win the right to work. Thus, just being willing and able to shell out the necessary litigation costs in a relatively short time often is more than half of the battle.
Are there other solutions for similar protection?
Even with the best planning, circumstances can make it impossible or impractical to have an enforceable non-compete. In those cases, there may be other options - like confidentiality agreements or trademark protections - that can provide similar safety for your business interests. Naturally, qualified and creative legal counsel can be an invaluable resource for creating solutions that are specifically designed to meet your needs.
Brent E. Dyer is an attorney with Looper, Reed and McGraw in Dallas, Texas.
