The Definition of a Non Compete Agreement
Non compete agreements are a form of restrictive covenant used widely in employment contracts. In Massachusetts, these types of contracts or agreements have been governed by common law only as a matter of contract law. Non competes are generally utilized by employers to restrict a former employee from working for a competitor or starting a competing business in order to protect confidential or proprietary information and/or to maintain customer goodwill.
A non compete agreement may contain provisions restricting (1) the place or geographic area where the employee may work , (2) the period of time in which the employee may work for a competitor or start a competing business, or (3) the type of work at or nature of employment that is restricted.
While these types of contracts are most commonly utilized by large professional firms and service providers (e.g., medical practices, investment banks, software companies, insurance agencies, and law firms), non compete agreements are frequently seen in smaller businesses, including both retail and non-retail companies.
The Function of A Non Compete Agreement Lawyer
Hiring a trademark or employment lawyer to draft, negotiate, or review a non compete agreement has many advantages. One benefit is that an attorney will ensure that an agreement complies with state laws. For example, not all states follow the same rules for imposing restrictions like who can be limited (employees vs independent contractors or employees of competitors), how long restrictions should last, what parts of a business can be limited, and whether the non compete has to have the same or different parameters when dealing with employees vs independent contractors.
An experienced non compete agreement lawyer will understand this area of the law and be able to advise you not only about the non compete agreement you are dealing with, but also the employment agreement, sales agreement, or other agreement that might involve your business. For example, if you are buying another business, receiving an investment, or having your business invested into, creating a non compete can be an important part of protecting the terms of that transaction.
Not only should you hire a lawyer to prevent issues from arising in the first place, if a lawyer is involved originally, then if a dispute does arise it is likely to be resolved more easily than if there was not a lawyer involved in the initial drafting or negotiation of the non compete. Dealing with conflicts in your business is never pleasant and having a lawyer experienced in non compete agreements can often allow you to resolve disputes without unnecessary litigation costs.
If a dispute over a non compete does arise litigation can be expensive and many non compete agreements have potential bankruptcy implications for a business if damages are awarded by a court. Having a lawyer involved from the start of your business or a relationship can also prevent litigation or at least prevent it from getting out of control.
The Core Components of a Non Compete Agreement
The elements of a non compete are simple enough: duration, geographic limitation and purpose – sometimes called a "legitimate business interest". In practice, though, the circumstances in which those elements are addressed differ from agreement to agreement. Duration, often the most contentious issue in settle an employment contract, is the time range specified in the agreement during which a party is restricted from competing with the other party. Depending on the situation, the duration can effectively be broken by the refusal of the other party to do business unless the non compete remains in force. Even so, there are limits on the amount of time that may reasonably be supported. Similar considerations exists in terms of geographic scope: when does the area defined in the agreement become effective? If that area is a state when does the restriction become operative: when I leave New York City and am driving across the George Washington Bridge into New Jersey? Does it become operative when I pass over the New Jersey border? An additional wrinkle is the idea of "legitimate business interests". Legitimacy is determined by the circumstances under which the agreement was signed. After all, if a surgical specialist is hired, in part, to promote the use of that surgeon by doctors in New York, then for a period of time after acquisition of a medical practice, there may be an interest in restricting the cooperation of those physicians with others as well. On the other hand, if an employer merely wants to protect its customer list, the argument quickly collapses after the employee leaves the company. No matter the circumstance, the specific elements of a non compete are often the subject of negotiations. Defining the boundaries and thereby limiting disagreement may be of some help. Above all, a reasoned analysis of the circumstances is important not only in order to conclude an agreement but in order to avoid future disputes.
Enforceability of Non Compete Agreements
Non competes are enforced if they are valid. Factually, there are two grounds upon which non competes are unenforceable under law: (1) there is no legitimate business interest in the geographical area of the non compete; and (2) the non compete is too broad in geographic scope, duration, and/or activity restricted. In most instances, if the company has a legitimate business interest in the geographical area, the court will find the non compete is valid if its scope is limited to the minimum extent necessary to protect the company’s interests. For example, if your region is Dallas/Fort Worth, then you ought to be able to enforce a company policy prohibiting the former employee from working in the entire region, provided the other elements of the non compete are met. The same applies to other businesses and professions.
Basically, the legitimate business interests that are protectable are as follows: (1) trade secrets, confidential information and proprietary knowledge; (2) training and investment in the employee; (3) protecting client relationships; and (4) maintaining customer goodwill. None of these interests are protected in an area that is too broad geographically.
Further, a non compete in Texas (and most jurisdictions) will not be enforceable if its scope is broader than the minimum area necessary to protect: (1) trade secrets, confidential information and proprietary knowledge; (2) training and investment in employee; (3) protecting client relationships; and (4) maintaining customer goodwill. In fact, there are numerous cases that invalidate a non compete agreement that covers a nationwide or even statewide non compete in favor of a reasonable geographical area (even when the trade secret or confidential information is statewide). This is particularly true when the company does not have offices, stores or locations in every metro area in Texas or is not in every state in the nation. For example, a 50 mile radius is generally too great to be enforceable for employees in the over-the-counter pharmaceutical industry.
Finally, entirely absent a legitimate business interest or protection need, some courts will still uphold a non compete that is entered into in consideration for continued employment or continued at-will employment, but only if the geographical scope of the non compete is sufficiently limited to pass muster. While not without controversy, this is becoming a more widely accepted position in recent years.
Contesting A Non Compete Agreement
Challenging a non compete agreement is initially filed as a Complaint and the legal process then ensues. There will be ongoing discovery, which includes written interrogatories and document requests, depositions of both parties and witnesses. Once the discovery phase is completed, there will be a hearing before the court on the Motion for Summary Judgment. If the non compete agreement is not released at the Motion stage, the case will be set for trial. Depending upon the circumstances, there could be interim injunctive relief hearings to address issues of non solicitation of clients, employees and confidentiality.
The case could end up being appealed twice, once from the Judgment on the Count One breach of contract claim and then a second time on the Count Two request for injunctive relief. Alternatively, the case could be settled during the process if the employer is willing to reduce or narrow the terms of their non compete agreements.
Not every non compete agreement has been upheld by the courts. The most prominent defenses by the employee to challenge the validity of a non compete agreement is if the restrictions for the employee’s post-employment activities are too broad in time and/or geographical scope and overbroad in the activities prohibited. The employer must have a "legitimate business interest" to enforce a non compete agreement , which is often the trade secrets of the company. A non compete agreement may be challenged and/or nullified if there was no consideration provided at the time that the non compete agreement was signed by the employee. The justification provided by the employer must relate to either customer relations, employee relations, or the protection of the employer’s economic interests. For example, if an employer is giving training to its employees or expending time and money to build up its clientele base, the covenant not to compete has more of the legitimate business interest of protecting trade secrets.
The common law of non compete agreements has evolved to protect the employer’s legitimate interest from possible misappropriation of trade secrets by the employee. However, if the terms of the covenant are too broad, this has been found to violate public policy and the non compete could be deemed unenforceable. The Florida rules for non compete agreements with non competitors which are governed by Fla. Stat. 542.335 will need to be met and fulfilled.
There is a significant amount of law on this issue, as well as article examples of how to challenge a non compete agreement.
Non Compete Agreement Trends and Changes In The Law
Non compete agreements have often been implemented by companies to preserve their interests, such as competitive advantage, by limiting the capacity of certain employees to work for competitors. While the agreements have great use as deterrent provisions to protect legitimate business interests, they have been difficult to enforce, and do not pass the scrutiny tests due to the overly broad language used in typical non compete clauses.
Over the last decade, there has been an increase in the restrictions placed on non compete agreements. Several state courts have defined what "legitimate business interests," mean, and most defined it with greater specificity than in the past. This evolving judicial attitude has enhanced the ability of companies to draft agreements that cannot be easily attacked and, therefore, are more enforceable. So for example, while a "confidential information" clause was once adequate to prohibit access to trade secrets, the term "trade secrets" has a very specific and well established definition, so companies must be very careful to specify the nature of the information, prohibitions as to its disclosure and use, the dissemination of trade secrets to competitors, and the definition of "outbound and inbound" information in the agreement.
The ability to restrict the employment activities of an employee is also intricately connected to a state’s laws. That is so, for instance, New York does not view a non compete provision in combination with other agreements (whole agreements) as a restriction on the employee’s ability to earn a living or work in his or her chosen profession. Before implementing a non compete agreement, it is important to understand the timing of such agreements and when they are permissible. Each state has its own rules and regulations as to the timing of execution of the agreements (i.e., before or during employment). These changes have actually become a very critical factor as to when and how to implement a non compete agreement.
"California (which prohibits non compete agreements), Texas (which limits the duration of the agreements to only one year) and Washington (where they are limited to 18 months)" have all weakened the usefulness of non compete agreements. In fact, in some areas, investor platforms refuse to fund companies with these provisions in place. Currently, the new trend is to draft non compete stipulations that have shorter durations of time, are reasonable in nature and cover geographically limited areas.
Along with the increased restrictions on non compete clauses, there also is a movement to narrow the clauses to involve highly compensated employees, start up companies, and fragile companies. For example, in the technology context, certain states are allowing non compete agreements that are limited in their scope and duration to short time periods and are utilized by start up companies.
Employer and Employee Guidelines for Non Competes
The key for employers in drafting non competes is to include confidentiality and non solicitation of employees protections in the non compete. You need to make the non compete the least restrictive means possible to protect legitimate business interests you have in the competitive marketplace. You should also limit the scope of your employees and which employees are subject to a non compete to the employees who AFTER a review of their job duties you feel can be considered a true competitor of your business.
The key is to generally take a "least restrictive" approach to constructing a non compete, because if a case goes to court, a judge will generally look at whether or not the non compete is "reasonable." In the Willoughbys’ case, many of their non compete restrictions would have been unenforceable if it were not for the fact that they negotiated them and eliminated the problem entirely by negotiating for a buyout. This should be everyone’s goal when negotiating an employment contract including non competes .
For Employees, the best advice is not to sign the non compete especially if you see or believe that your skills can be used to compete against your employer. You should take the position that the company is hiring you for YOUR skills and that if you are not impacting the company’s business then the company does not have a business interest to protect in the non compete. You should also let them know that it is not your skills that are your competitor’s market and therefore, it is YOUR skills which should be protected and available to the marketplace without restriction. Also, because the law is so different in each state regarding non competes, if you are moving to a new state for the job it would be interesting to know if the company knows about the states restrictions regarding non competes. For example, in Massachusetts, non competes are unenforceable against Massachusetts employees so technically, your employer could not enforce the non compete against you if you went to work for another employer in Massachusetts. And certainly, the judge may even throw out the non compete in a lawsuit if it is believed to be so onerous that it is against public policy.