What is a Noncompete Agreement?
A non-competition agreement, commonly referred to as a non-compete, is a legally enforceable contract between an employer and an employee that restricts the employee from entering into or starting a similar profession or trade in competition against the employer for a certain period of time after they leave the company. An employer primarily uses it to protect its own business interests and to prevent their employees from using the skills that they learned while working for them against them after the employee leaves the company . Although non-competition agreements are generally void in California, they can still be enforceable in certain situations. In fact, there are different types of non-competes that are enforceable but must still be reasonable with regards to the scope of employment, and geographical location. Non-competes are also still valid across the country outside of the state of California.
Essential Components of a Noncompetition Clause
If the non-competition agreement is to be valid, it must be given in connection with a protection of a legitimate business interest. Such an interest exists if the employer incurs substantial injury or expense, or if such injury or expense is likely to result. large clients or customers and confidential information are generally protectable, as well as trade secrets. Your attorney may be able to identify other legitimate business interests as well.
A non-competition agreement should always be drafted by an attorney. The agreement should describe in detail the activities the restriction should cover. It is also important to define what geographic area the restriction should cover. Some employers have used state boundaries as their geographic area. Depending on the business, if you have an employer with multi-state customers or offices, you may be signing a two-year agreement with no geographic limitation. This is how crucial it is that an illicitly general restraint be specific on its face, such as commonly understood to mean, "as far as I can go to run my business in a certain market before I would be competing with you."
There are no set time frames which are considered enforceable for non-competition. A non-competition agreement has been thrown out as being unreasonable because it was 30 years and extended to future generations of officers. Non-competition agreements of three years or less have been upheld, but be aware that what may be reasonable and which may be unreasonable is very fact specific. More commonly, the applicant is asked to sign a non-competition agreement at the time he starts work for the employer.
Legal Validity Across Jurisdictions
The enforceability of non-competition agreements fluctuates significantly between states. Some jurisdictions, such as California and North Dakota, refuse to enforce non-competition agreements entirely. Massachusetts and some other states have developed substantial legal precedents limiting such agreements. Other states are more liberal in their restrictions. For example, Florida generally has upheld non-compete agreements, although they are required to comply with several statutory conditions. Non-competition agreements are more frequently upheld in the health care and technology contexts.
It is critical that companies evaluate the enforceability of non-competition agreements carefully before requiring state employees to enter into such agreements. They must recognize that the agreements may be enforceable in some states but not others, and that their employees may have offices or work in more than one location that make them subject to the laws of different jurisdictions. Companies and their physical locations may be treated differently under the law. For example, a health care practice may have a surgery center in California and offices in New York.
The enforceability of non-competition agreements is also subject to change. In 2016, New Jersey passed new legislation that will make non-competition agreements unenforceable for lower-wage earners (earning less than $15 per hour) effective in 2019. Courts in other states may follow this trend, and legislation regarding non-competition agreements is under consideration in other jurisdictions.
Companies that do business in multiple states may want to consider using employment agreements for two or three different categories of positions in which the company operates. For example, the lawyer may request a more restrictive non-competition agreement than the employee who sets appointments for patients in an office. The company may also wish to use separate agreements for senior executives and other employees. This could reduce the chance that the company will be held to a broad non-competition agreement that it entered into with a low-level employee who then moved to a more responsible position.
The Role of a Noncompetition Agreement Lawyer
A lawyer is essential for the drafting and review of legally binding contracts to protect the rights of each party. An experienced non-competition agreement attorney is necessary to ensure that the contract is legally enforceable and in compliance with applicable law. A non-competition attorney will work directly with their clients to establish an appropriate contract that does the best job possible of protecting their professional interests.
While a non-competition agreement attorney will draft the contract, they can also consult for or represent the client if the enforcement of the agreement becomes necessary. If you are careful about choosing an experienced non-competition agreement attorney to draft a contract, it can usually handle the situation should one party later attempt to enforce the terms of the contract. When the other party files a complaint to have the non-competition agreement enforced, an experienced non-competition agreement attorney will be able to go on the offensive against him or her in defense of the client’s best interests.
Common Litigation and Resolutions
Common disputes arising out of non-competition agreements typically concern, among other things, the enforceability of the agreement or whether a breach occurred. A common dispute is whether the scope of the restriction is overbroad, either with regard to its duration, its geographic restriction or both. Some, but certainly not all, courts will hold that one or more of these agreements are unenforceable because the restriction is overly broad and therefore not reasonably necessary to protect the employer’s legitimate interest. Another common dispute arises when a former employee waives enforcement of the non-competition restriction and then gets re-hired by his or her former employer subsequently. Does this waiver revive the restriction at all, and if so, does it make the non-competition restriction enforceable for an additional year?
In addition to the foregoing, non-competition disputes also arise when the former employer has the burden of convincing the court to issue a preliminary injunction or even a temporary restraining order against the subsequent employer . In New York, while a plaintiff seeking injunctive relief must "demonstrate a likelihood of success on the merits, irreparable harm, and a balance of the equities in its favor," the burden is even higher in Tennessee. In Tennessee, a party must demonstrate "at least a substantial likelihood of success on the merits" in order to be entitled to a temporary injunction. However, even where the non-compete agreement is otherwise enforceable, a court will not grant a temporary injunction unless the employer’s interest in enforcement outweighs the hardship of the employee.
As the foregoing shows, typical settlement strategies in non-compete disputes include negotiation with the other side in order to resolve the controversy without the employer becoming distracted from its regular business and to avoid legal fees. However, non-compete agreements can also be used as negotiating tools in order to settle disputes with customers or frankly, as a way to protect against future breaches.
Helpful Hints for Employers and Employees
Employers drafting non-competition agreements should clearly define and explain the business interest of the employer being protected by the non-competition agreement, particularly in states like California where non-competition agreements are illegal unless they are part of a larger sale of a business.
Employers should consider limiting the temporal and geographic restrictions to ensure that it does not "exceed what’s reasonably necessary to protect the company," that is "a legitimate business interest," as discussed by Robert Chapman of Bryan Schwartz Law in an article for Forbes. The employee’s position can also be addressed; if someone doesn’t possess trade secrets or sensitive customer information, the restrictions might not be appropriate. Employers who violate non-competition laws may be subject to civil suits by employees and face poor publicity.
Employees asked to sign non-competition agreements, particularly those with strict and far-reaching restrictions, should educate themselves on the non-competition laws in their states through articles like this one. They can also ask to clearly define the general nature of the employer’s business interest being protected by a non-competition agreement and if possible, negotiate for a less-restrictive agreement or a base salary that allows them to risk signing one.
Nicholas W. Morgan of Morgan & Akins says potential employees should "carefully scrutinize" non-competition agreements, keeping an eye out for vague language that questions what the future employer’s interests are in enforcing the clause, in terms of both geographic location and business interest. He recommends making only one geographic restriction, while showing good faith and legitimacy.
Morgan advises employees to preserve evidence of the things they have created on their own time and with their own money, such as drafts of client lists on personal computers. He also advises against answering a colleague’s question about a former customer, since that could be considered "compromising proprietary information, even if it isn’t."
Future Developments in Non-Compete Law
Businesses and legal professionals should be aware of the fact that the law surrounding non-competition agreements seems to be constantly evolving, and there is no guarantee that any particular non-competition agreement will be enforceable forever. For instance, the Idaho legislature passed a law in 2018 restricting the duration and geographic scope of non-competition agreements entered into by Idaho employees. Also within the last year, The United States Court of Appeals for the Ninth Circuit overturned a previous decision interpreting the situs of a non-competition agreement for a California employer . These are just a couple examples of how the law surrounding non-competition agreements is seemingly ever-changing and could continue to change in the coming years.
Outside of direct legislative changes, given the uncertainties surrounding the viability of non-competition agreements and the apparent trend by courts to more closely scrutinize non-competition agreements, it is reasonable to expect that businesses will continue to rely on overly broad or poorly drafted non-competition agreements at their own risk. Hopefully, however, given this blog post and similar resources, legal professionals can provide their clients with quality legal advice when it comes to non-competition agreements and when those agreements should be relied upon by a business.