Non-competition. The very term seems un-American. In this country, we are all about competition, free, unfettered, plain old American competition. Right? Right. That pretty much sums up the same attitude that the American courts have towards non-competition agreements. It gives them gas! Still, non-competition agreements are not per se illegal. How do you walk the fine line between protecting your trade secrets and other confidential information using a non-competition agreement and running afoul of the natural disdain with which courts hold such agreements?
Non-competes are designed to protect a business’ interests by limiting competition. Generally, non-competes are pursued in two situations: (1) when hiring a new employee; and (2) when purchasing an established business. For purposes of this article we will just focus on the first situation, non-competes tied to employment, as these tend to be more contentious and debated situations.
By their very nature, non-competition agreements (or non-competes) are controversial. Any restriction on a person’s right to work is a restraint of trade and may be prohibited if it is excessive or unreasonable. Courts are cautious about enforcing them and reluctant to prevent a person from working in his field and exercising his trade. Non-competes are cases brought in equity. Courts are looking for a fair and equitable result.
Non-compete law is a complex and evolving area of law, which varies significantly from state to state. From a drafter’s position, it’s adult-swim only. One agreement will not be suitable for everyone. As an employer, you should view each non-compete as unique and tailor it to the situation at hand. If narrowly drawn and tailored to the specific situation, non-competes can be one of several valuable tools in protecting your confidential information and trade secrets. An understanding of the legitimate basis for using non-competes, together with the addition of tailor-made strategic terms discussed below will help an employer draft a non-compete that will fit the particular situation, and more likely to be upheld in a court of law if challenged.
In determining the validity of a non-compete, the court must determine whether or not the restraint on competition is reasonable. The business must have a legitimate business interest or purpose to protect, the non-compete must go no further than necessary to protect this legitimate business interest, and it must not go against public policy. So, for example, does a Sherwin-Williams have a legitimate interest in preventing a mail clerk from working for DuPont? Probably not. This type of agreement might be viewed as punitive. Non-competes cannot be used to punish, but only to protect legitimate business interests. If a former employee is in a position to possibly give the new company an unfair competitive edge, then there exists a legitimate purpose to protect, but not otherwise.
What constitutes a legitimate business interest differs from state to state. Those legitimate interests that are recognized generally in states permitting non-competes are protection of trade secrets and/or confidential information, customer relationships or good will, and specialized training. Even supplier relationships have been recognized as a legitimate protectable interest by an employer to justify the necessity of a non-compete.
Consider what it is you’re trying to protect. Is your concern that your salesperson will work for a competitor as a salesperson, or that he will steal your customers? If the latter is your concern, and you wouldn’t give a flip if he worked for someone else, just so he doesn’t go fishing in your pond, then a non-solicitation agreement might accomplish your objectives just as well, and be more likely to be upheld by the courts.
Once you’ve decided the non-compete route is what you want to take, then you will want to make sure that the agreement is reasonable with regard to duration, geographical limits and activities.
DURATION. One year is often considered reasonable. Again, there are exceptions, and each non-compete should be viewed independently to determine the least amount of time necessary to protect the legitimate business interest. If the court determines the duration is overreaching, it will revise the agreement or toss it altogether.
You can also include a tolling provision in your non-compete that extends the duration of the non-compete until such time as the employer discovers that the employee is violating her non-compete. That way, if the unlawful competition occurs for 6 months prior to your becoming aware of it, you will still have the full duration of the term that can be enforced under the non-compete.
GEOGRAPHICAL LIMITATIONS. Limiting where a former employee can work will be viewed unfavorably by a court if the geographical restraint is more than necessary to accomplish the employer’s objective of protecting its business interests. The key is to draft it as narrowly as possible.
DUTIES. The non-compete should state what type of duties the employee is prohibited from engaging in. However, in the event the employee changes duties during his employment with your company, you do not want the non-compete to become void. So, you can include a clause stating that during the term of his employment, the employee’s responsibilities may change, but the relationship will still be governed by the same non-compete. Again, though, the employer’s interest in prohibiting the person from doing that particular job must be related to the legitimate business interest the employer is trying to protect. So, if the change in responsibilities is ultimately a demotion to a position that would not give a competitor an unfair advantage should the employee go work in that capacity for the competitor, the non-compete might not be upheld as written.
An employee must be given consideration for her promise not to compete. She’s not going to just agree to it for nothing, right? Proper consideration is that which gives rise to the need for the employer to protect, such as the disclosure of confidential information, and specialized training. States differ on whether continued employment is sufficient consideration to support a promise not to compete where the employment is employment at-will, since the employer can terminate employment at its discretion.
As consideration for a non-compete, confidential information should NEVER be disclosed prior to the employee signing the non-compete, but only in exchange for the non-compete. Think like you’re a little kid…you don’t give up your secret hiding place until the other kid has made his promise to keep it a secret. Once the confidential information has been disclosed, new consideration is generally required for a promise not to compete by the employee.
There is a school of thought that in drafting non-competes, that it is better to be as sweeping as possible in the scope of your non-compete to cover any situation that might arise, but just in case you’ve gone too far, you give the court authority to scale it back to something legal, (referred to as “blue pencil” clauses). Don’t go to that school. Rather than reform these agreements, oftentimes, courts will simply toss the entire agreement.
Choice of law and where you bring suit (forum) is also a big consideration. Because state laws vary greatly on non-competes, forum selection and choice of law issues can make or break a case. California and Colorado only allow non-competes in select situations, whereas Oklahoma and North Dakota forbid them entirely. When a top exec at Microsoft left to work for Google, Google tried its best to move the case to California where the non-compete would be prohibited. This attempt failed, and the non-compete was upheld.
As you can see, the drafting and enforcement of non-competition agreements is a nuanced exercise. One size does not fit all. You cannot apply the same non-compete to your salesperson as to your plant manager. You cannot apply the same conditions (term, geographical limitations or limitations on job duties) to each situation. You can’t even rely on consistent state laws. In some cases, you probably should not use one at all, defaulting instead to another mechanism for protecting your business interests. But if you do choose to use one, then a non-competition agreement should be just one piece of the innovation protection pie, used in connection with confidentiality, non-solicitation, anti-raiding and assignment of invention agreements to comprise a well-balanced intellectual property program.