NonCompete Agreements When Do Companies Need Them

Non-Compete Agreements: When Do Companies Need Them?

Typically, non-competes are executed prior to and as a condition of employment, and provide for: A defined period of time following the termination of employment during which the covenant will be enforced; A limitation in the type of services that can be performed for another employer; and A geographic restriction to the performance of such work or services

During a recent episode of the HBO drama “The Newsroom,” the show’s protagonist, Will McAvoy, a cable news anchor in the mold of Dan Rather (with a dash of Keith Olbermann) learns that his corporate higher-ups have orchestrated a smear campaign as a pretext for eventually terminating his employment. 

Also revealed is the fact that upon Will’s ouster, the network would enforce a non-compete agreement in his contract, keeping him off the air for three years. 

As an attorney who has litigated the validity of non-compete agreements on behalf of both employers and employees in a variety of industries, I asked myself whether, in the real world, Will’s non-compete would be enforceable.

The turn of events also reminded me why a vast range of employers, including manufacturers, use non-competes in the first place.

Both small and large business owners depend on skilled employees to engender company success and growth. Simultaneously, employers operate with a reasonable concern that their valuable employees might jump ship to join a competitor. 

This can be a daunting experience for a company that has expended considerable resources training that employee, providing her with proprietary information about the company’s processes and procedures, and offering access to customer information.

Similarly, employees reasonably desire to reach their professional goals and protect their own ability to earn a living without outside interference. These competing interests have equal validity and are the kinds of concerns that have been tackled by courts for years, with varying outcomes.

What is a Non-Compete Agreement?

A non-compete agreement is a “restrictive covenant” that prohibits an employee from working for a competitor or engaging in a related business. Typically, non-competes are executed prior to and as a condition of employment, and provide for:

  • A defined period of time following the termination of employment during which the covenant will be enforced;
  • A limitation in the type of services that can be performed for another employer; and
  • A geographic restriction to the performance of such work or services

Most non-compete agreements also include language prohibiting the use of confidential and/or proprietary information of the former employee, and provisions that prevent the solicitation of the employer’s customers or clients for a defined period.  Often confidentiality and non-solicitation agreements will be upheld, even if the non-compete is not.

Historically, limited categories of employees were asked to sign non-compete agreements:  corporate executives, top sales representatives, creative personnel, those with specialized talent or skills, and scientists engaged in research, design, or product development, to name a few. 

Over time, however, the universe of such employees has expanded to include even general office staff who have access to protectable corporate processes and customer information.

In short, anyone with sufficient “know-how” or information about a company’s business to start-up or join a similar competing business may be required to sign a non-compete.

When is a Non-Compete Enforceable?

The law favors competition, the ability to engage in the work of one’s own choosing and a person’s unfettered mobility to seek professional opportunities. Given that restrictive covenants almost always favor the employer, non-compete agreements are viewed disfavorably in every jurisdiction, some of which prohibit or limit their enforcement. 

However, the fact that restrictive covenants are subject to scrutiny does not mean that they are never enforceable.

In most jurisdictions, well-crafted non-compete agreements will be enforced where the restriction is not greater than is required to protect the legitimate business interests of the employer (including preventing the competition from its former employee); does not impose an undue hardship on the employee; is reasonably limited in duration and geographic scope; is supported by consideration and  causes no injury to the public.

Some jurisdictions mandate the striking down of an entire agreement if any portion of the non-compete is unreasonable.  Others will strike unreasonable clauses or even re-craft unreasonable clauses to make them reasonable. 

As a practical matter, preventing former employees from working for a competitor can be difficult, especially if a person’s skills and experience are industry specific. 

Even then, where one’s professional background may be applicable only to small universe of employers, non-compete agreements can be a valuable tool to keep vital employees in the fold and, if they decide to move on, to ensure that their loss will not result in material and long term losses for the former employer. 

Both the employer and employee must balance these potential conflicts, as well as the costs associated with pursuing or defending a lawsuit. In the end, whether an employer will be able to enforce a non-complete agreement is dependent on the facts and circumstances surrounding each specific case. 

As for Will McAvoy, in the real world his continued ability to appear on television without interruption would depend on the prevailing law of the applicable jurisdiction, the retention of skilled legal counsel, and, of course, the amiability and charm that draws viewers to him in the first place. 

Gary M. Heller, an attorney with the law firm Hodgson Russ LLP, represents clients in a broad range of commercial matters, with an emphasis on contract and business disputes; employment disputes; and litigation involving real estate, telecommunications carriers, and estate-related matters. He can be reached at [email protected].

 

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