NONCOMPETITION AGREEMENTS – SEPARATING FACT FROM FICTIONRobin Foret
September 28, 2009 — 2,253 views
Employers are increasingly asking their employees to sign non-competition and non-solicitation agreements in an attempt to prevent the loss of customers and business when an employment relationship ends. Employers and employees alike have many misconceptions concerning the use, and enforceability, of these contracts. Separating fact from fiction will lead to better drafted agreements at the outset and can reduce the number of disputes that arise concerning the scope and enforceability of these arrangements. Although non-competition and non-solicitation contracts are frequently used in the context of a sale of a business, the discussion below is confined to an employment situation.
Basic Principles: Most management level employees, as well as some other employees, are given or at least have access to company information that is confidential and proprietary in nature, which means it has taken the company time and money to develop the information, and it is not generally known to the public (“Confidential Information”). Arguably, access to a company’s Confidential Information provides employees with an unfair advantage in the industry in which they worked after they leave the company. A true non-competition agreement limits competition with the former employer by prohibiting employment with a competitor or another business in a similar industry for a period of time following the termination of the employment relationship. Non-solicitation agreements, on the other hand, restrict contact with and/or the solicitation of customers (and often prospects) with whom the employee has had contact or about which they have obtained knowledge. The theory is that such restrictions, for a limited period of time (12 or 18 months for example), allows time for another employee-representative at the company to contact and develop a relationship with customers before the departing employee can divert those contacts to his or her new location. Collectively, these types of agreements are called covenants not to compete and are generally governed by the laws of the state in which the employee has been employed. This type of arrangement is permitted as a narrow exception to general anti-trust laws that favor unrestricted competition in the marketplace.
Enforcement: Courts generally disfavor covenants not to compete clauses, and are more likely to uphold carefully drafted provisions that are reasonably tailored to provide only those limitations that are required to protect the company’s business and good will. Non-solicitation clauses are typically favored over non-competition clauses, and the courts in some states will not allow the true non-competition arrangement in which an employee is precluded from working in an industry. Although there are differences from state to state, the majority of the jurisdictions apply reasonableness standards with respect to the scope, geographical location and time period for these arrangements. Courts rarely enforce overly broad language that far exceeds the scope of what the company actually requires to protect its bottom line. While some states will invalidate overly broad provisions so that they are completely unenforceable, other states will allow such provisions to be re-written to make them reasonable under the law. In instances in which the agreements are modified, the employer may be limited to injunctive relief on the revised agreement, but be precluded from obtaining any damages for an employee’s violation of the overly broad version of the agreement.
Employer’s common misconceptions: One of the most common misconceptions for employers is the belief that it is best to draft covenants not to compete as broadly as possible even if greater than necessary to protect the employer’s interest, just to cover all bases. This is almost always a bad strategy because it can result in the agreement being held unenforceable. If the agreement is enforceable with modifications, it will often diminish the relief to which an employer is entitled when that agreement is violated by a former employee. An example is when a company attempts to prevent an employee from working for any other company that is engaged in a similar business in the United States, or from contacting prospective customers regardless of whether the employee has obtained any information concerning those prospects. While there are exceptions depending on the employee’s position at the company, these restrictions are very often considered to be overbroad. A tip for employers is to seek advice from a specialist experienced with covenants not to compete to make sure that the agreement you are drafting is reasonable given the particular state law and the particular employment arrangement at issue. Do not wait until you wish to enforce the contractual arrangement to find out whether it is, or is not, enforceable.
Employee’s common misconceptions: Employees often mistakenly believe that such agreements are basically unenforceable and there really is not much to worry about. After all, my former employer cannot prevent me from earning a living. In most states, this is not true. While it is true that there are limits to what a court will enforce, in most jurisdictions, at least with respect to non-solicitation provisions, a well drafted provision that is narrowly tailored to the scope of the employee’s work and not overly broad will be enforced. Courts have been known to assess damages against certain employees who violate such agreements, and the litigation process can be extremely costly. Employees should seek the advice of counsel before making a unilateral decision that the agreement is “not worth the paper it is written on” and proceeding to violate the agreement.
Bottom Line – when it comes to covenants not to compete an ounce of prevention is worth a pound of cure. Employers should seek advice at the drafting stage to make sure that the covenant not to compete is enforceable, rather than wait until an agreement must be enforced against a former employee. Employees should obtain advice concerning such covenants before signing on the dotted line, and certainly before making a decision to just ignore an agreement that has already been signed.
The information contained in this article is not designed to address specific situations, and does not include rules or regulations that apply to all states. If you have questions concerning this topic, you should consult with legal counsel of your choice to obtain advice on various fact specific matters.
The Foret Law Firm
Robin Foret practices in the areas of employment law, commercial litigation and specialty insurance defense claims. She handles a variety of employment matters such as theft of trade secrets, breach of employment agreements, non-competition agreements, wage and hour issues under the Fair Labor Standards Act (FLSA), discrimination and harassment issues under Title VII of the Civil Rights Act of 1964 (Title VII) and the Texas Commission on Human Rights Act (TCHRA), the Americans with Disabilities Act (ADA), Family Medical Leave Act (FMLA) issues, and the Sarbanes-Oxley Act (SOX). Robin has handled a wide variety of employment law matters for employers, as well as for executive-level employees, before agencies, and state and federal courts.