Non-Compete Agreements – The Changing Law

Traditionally, non-compete agreements were only given to high-level employees, such as executives. However, over the last decade, non-compete agreements have become ubiquitous in the American workforce. Employers wish to protect their confidential business information and prevent former employees from taking that information to competitors. But organizations rarely ask the question: how enforceable is this restrictive covenant? And, at what cost am I willing to try to enforce it? This article will detail the requirements for a valid non-compete agreement, and explore just how difficult they can be to enforce.

What is a Non-Compete Agreement?

A non-compete agreement is a type of “restrictive covenant,” which means that an employee contractually promises not to engage in defined behavior that is counter to the employer’s interests. In addition, many agreements contain non-solicitation clauses dealing with either a restriction on soliciting clients/customers and/or a restriction on not soliciting away employees from the prior employer. Employers view non-compete agreements as vital to protecting confidential business information and trade secrets, such as future marketing plans and products.

Most sophisticated employment agreements  contain a “prior agreements” clause, which requires disclosure to the new employer of any agreements from a previous employer that may affect your new employment, such as non-competes and  non-solicitations.

In recent years, there has been a growing trend to include non-compete agreements for all levels of employees, even lower-wage employees, or other employees who do not have access to trade secrets or confidential information.

In order for a non-compete agreement to be valid, the agreement must be: (i) necessary to protect the employer’s interests; (ii) reasonable in duration and geographic scope; (iii) consistent with public interest; and (iv) supported by consideration. Courts recognize two main employer interests: goodwill with customers, clients or vendors; and confidential business information and trade secrets. Goodwill includes intangibles such as market position and reputation. Confidential business information involves valuable information that is not publicly available. If good will or confidential business information is not at risk, then the non-compete agreement is not enforceable. However, this has not stopped employers from widely utilizing non-competes.

Is My Non-Compete Enforceable?

To the surprise of employers, in many instances the answer to this question is no. As discussed above, in order to be enforceable, a non-compete must protect an employer’s valid proprietary interests in its confidential information. The employee must have access to the employer’s confidential business information and trade secrets, and pose a threat to share that information if employed by a competitor. If the employee does create a risk of exposing confidential information, then the employer must create a reasonable restriction in the time, scope of duties, and geographical area of the non-compete agreement. If the non-compete is for too long of a duration (usually anything more than two years), or covers too broad of a territory (this is a more difficult analysis if an employer does business globally), then the agreement will be unenforceable. The scope of duties and geographic territory of the non-compete agreement needs to be narrowly tailored to protect the employer’s interests.

The use of non-compete agreements on employees who do not have access to confidential information can negatively impact an employer’s ability to enforce the agreements. In some situations, employers who use non-competes on overbroad segment of their workforce have had their agreements invalidated.

Protection of Low-Wage  Employees

With the use of non-compete agreements becoming more widespread, some states have begun enacting laws to protect vulnerable workers. The Attorneys General in several states (including New York, New Jersey, California, The District of Columbia, Maryland, Massachusetts, Illinois, Pennsylvania, Minnesota, Oregon, Rhode Island and Washington State) are targeting industries, such as national fast food and retail companies that use non-competes in their business. The effort is to limit the use of non-competes or limit their broad language.

Also, Illinois enacted the Illinois Freedom to Work Act, which prohibits employers from using non-compete agreements with low-wage workers. New Hampshire and New Jersey have proposed similar laws. In addition, there have been several decisions in which courts throughout the country have refused to enforce non-compete agreements against low-wage workers.

Employers need to be aware of how certain jurisdictions treat non-compete agreements. In deciding whether to utilize a non-compete, an employer may want to include a choice of law or venue clause. For example, some states such as New York, New Jersey and Connecticut  allow the “judicial blue-pencil” to modify the terms of a non-compete if they are unreasonable. In contrast, California generally prohibits non-compete agreements as a matter of public policy. California courts have even found employers liable for terminating employees who refused to sign non-compete agreements. In addition, the courts often view with favor a non-compete clause that includes a specific, limited list of employers the employee cannot join during the restriction period.

Deterrent Effect

Some employers may use non-compete agreements with the knowledge a court would likely find them unenforceable. These employers are taking advantage of the non-compete’s deterrent effect. Most employees are unwilling to breach the terms of a non-compete, for fear of retribution. Many employees lack the sophistication or resources to challenge a non-compete agreement, and therefore comply by the terms in the agreement.

Takeaway

Regardless of how well-drafted an employer’s non-compete agreement may be, the employer must have a plan of action if an employee breaches the agreement. Litigation is very expensive and also potentially risky. Also, if word gets out that a particular employer does not enforce its non-competes, that employer also loses the deterrent effect of the agreement.

It is time for non-compete agreements to return to their roots as employer protection against the sharing of confidential business information by high-level employees and other employees who have access to confidential information due to the nature of their job responsibilities. Employers need to carefully craft non-compete agreements to balance achieving their desired goals and enforceability. In doing so, the employer strengthens both the deterrent effect and the ability of the non-compete language to withstand scrutiny.

Jules Halpern Associates LLC

Workplace and Education Law Advisors

Jules Halpern Associates LLC
JULES HALPERN ASSOCIATES LLC is a boutique law firm committed to serving our clients in all facets of their workplace issues. We provide personalized, practical advice that resonates with our clients’ business objectives.
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Jules Z. Halpern

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