Faced with mergers, layoffs, and terminations, bankers should take full advantage of noncompete agreements to help protect their bank’s goodwill. (And their own!)
As key players come and go, banks, bankers, and directors all have a stake
By Heidi A. Guttau-Fox
As a director for my family-owned community bank in Iowa and a labor/employment practice attorney, I have seen some banks use noncompete agreements quite effectively. However, others often don’t use them as they might. In this volatile economy and with the many changes confronting banks, including, in many cases, layoffs or terminations of key employees, banks should be taking advantage of this tool critical to protecting their goodwill.
Every bank should be evaluating:
• Whether they need to implement noncompete agreements with key employees (using enforceable state-specific language).
• Whether they must update noncompetes already in place to ensure enforceability.
• Whether incoming employees are abiding by noncompetes with their former employers.
• Whether outgoing employees are honoring their valid noncompete agreements.
On the flip side, individual bankers, CEOs, and other key employees need to know their options before entering such agreements. They need to know how to deal with noncompete agreements during changes in employment.
Competitive armor for your bank
An enforceable noncompete agreement can benefit your bank in many ways. For example, such agreements are vital to protecting your bank’s goodwill and preventing unfair competition by key employees who are terminated or leave on their own. Noncompetes protect bank customer relationships, which it paid the departing employee to develop for its benefit.
Assuming that the bank has an enforceable agreement, there are several remedies which banks can pursue if a former employee violates an enforceable noncompete agreement. These remedies include: injunctive relief (a court order prohibiting the employee and/or the employee’s new employer from violating the agreement) and monetary relief, in the form of recovery of revenues lost due to the employee’s violation of the noncompete agreement.
Importantly, if your bank has been harmed by an employee’s violation of a noncompete agreement, it should act swiftly in pursuing legal action. This ensures that there is no appearance of acquiescence in the former’s employee’s actions.
Enforceability is key. Because state laws vary widely, banks should consult legal counsel experienced in noncompete law, to ensure that their noncompete is airtight and contains the language required by the relevant state’s law. Courts in some states strictly require specific language to enforce a noncompete agreement.
In general terms, a three-part test can be used to evaluate enforceability: necessity to protect a legitimate business interest; whether the restriction is unduly harsh and oppressive on the former employee; and, finally, any reason the restriction could cause harm to the public—a rarity for businesses like banks. (The test is described further in the detailed online version of this article at www.ababj.com)
Be aware that if the bank’s noncompete language is included in standard employment contracts, an unenforceable clause anywhere else in the document could invalidate or void the entire contract, including the noncompete provision. Many states will not revise employment agreements in favor of the employer.
Generally a noncompete agreement will be enforceable by the successor bank in a merger or acquisition. If the transaction is structured simply as an asset purchase, however, enforceability becomes less clear and new or amended noncompete agreements may be advisable at the time of the transaction.
A matter for “consideration”
Noncompetes must be a two-way street. The bank’s agreement must be supported by adequate consideration for the former employee. That is, what did the bank give to the employee in exchange for the employee’s promise not to compete or solicit business after termination?
Of course, the ideal time to have your employee enter into a noncompete agreement is at the beginning of employment. In this way, the consideration involved becomes part of the actual offer. However, as employees develop and key employees emerge during employment, some states have found continued employment and other options to suffice as consideration for a noncompete entered into at the outset.
Creative strategies can be used, as discussed online, to address post-offer situations to protect your bank. It is also advisable to include a non-solicitation provision and provisions protecting confidentiality of the bank’s business information, client lists, trade secrets, financial information, strategies, etc., in a bank’s noncompete agreements.
There’s a flip side here, too: What should a bank do when an incoming employee is bound by a noncompete agreement? Banks must be diligent in honoring enforceable noncompete agreements which bind incoming employees. Different strategies can be used to determine if the agreement is enforceable.
Your own noncompete agreements
Turnabout applies here. There are steps that bankers, CEOs, CFOs, or other key employees can take to protect themselves individually in regard to noncompete agreements.
These steps—similar to those for employers—include obtaining legal advice; evaluating the enforceability of the noncompete agreement; knowing which state law will be applicable; and, possibly, negotiating changes in your favor. In addition, an employee may take “preemptive” action by filing a lawsuit asking the court to declare the noncompete agreement unenforceable.
Where the board’s interests lie
Directors must have a general understanding of noncompete agreements and when they should be used. In any hiring decision in which the board is involved, the board will want to ensure that a valid and enforceable noncompete agreement is required of key employees. Given these high-level employees’ important positions with the bank, their relationships to clients, their access to confidential information, and their influence with customers, employees, and the community, a valid noncompete agreement is critical. Board members, especially in smaller communities, may become aware of information suggesting that a former employee is competing with your bank in violation of his or her noncompete agreement. Swift action must be taken to permit “damage control.” •
Heidi Guttau-Fox is an attorney with Baird, Holm, LLP, Omaha, Neb., and a director of Treynor (Iowa) State Bank. A more-detailed version of this article appears on www.ababj.com
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0710/index.php?startid=16
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