Avoiding Non-Enforcement of Non-Competes
The use of non-competition agreements to protect a company’s relationships and sensitive information is a relatively common practice. What can be less common, however, is careful use of non-competition agreements, with the potentially damaging consequence of making a non-compete unenforceable at a time when protection of business interests is critical.
There is no magic bullet to guarantee enforcement of a non-compete, as the legal standards in this area – even in more non-compete friendly states – delegate significant discretion to judges, resulting in potentially different results on similar sets of facts. However, there are steps companies can take to make careful use of non-competes to enhance the likelihood of enforcement. If a company deems it critical to protect its investment in people from being used against it, the employer would be wise to consider the following:
Know the Applicable State Standards
There is no uniform body of law in the United States because everything is left to a broad divergence of state laws. For example, in California and North Dakota (perhaps one of the few times you will see similarities between North Dakota and the Golden State…), non-competes are almost categorically unenforceable except in very narrow circumstances typically arising from the sale of a business. On the other end of the spectrum, Florida has reasonably clear statutory factors establishing what types of agreements are presumed enforceable and unenforceable and what kinds of agreements depend on the specific circumstances at issue.
Other states have other limitations, such as Illinois, which has recently concluded via judicial decision that non-competes must be supported by separate consideration outside of providing at-will employment. In Wisconsin, if any part of a covenant not to compete agreement is overbroad, that particular covenant will be void and unenforceable and there is no ability to modify it to salvage some restrictions as to that particular covenant. However, most states afford some flexibility by allowing courts to either “red pencil” (strike offending provisions and enforce an agreement if possible) or “blue pencil” (revise offending provisions of a non-compete to protect both sides, provided the entire agreement does not overreach) in the event of an overbroad set of restrictions.
Given the divergence in enforceability standards, knowing what state rules will apply is a critical first step. And while some multi-state employers attempt to use “choice of law” provisions requiring all non-compete agreements to be interpreted using one (presumably favorable) state’s standards, the courts where the employee actually works are often reticent to enforce these provisions. The lesson: Know the standards at issue and account for them.
Carpet Bombing Your Workforce Is Not the Best Approach
The purpose behind a non-compete is to protect an employer’s legitimate protectable interests vested in an employee who could cause actual harm to a company by working for a competitor. Consequently, non-competes should only apply to individuals who could actually cause harm to the employer when they depart, and the usual circumstance is that most employees’ work does not give them access to the keys to the kingdom.
Nevertheless, some businesses have large sectors of their workforce, or even all employees, sign non-competes without regard to the actual likelihood of future harm from a specific individual. This can come back to bite an employer trying to enforce a non-compete in a critical situation because the employer can be seen as overreaching on what it considers its protectable interests, undermining claims about the importance of protecting the interests with respect to a given employee. On the flipside, some courts can find a non-compete unenforceable as applied to a specific individual because the employer does not obtain them from similarly situated employees.
Either way, a knee-jerk reaction to non-compete use without thinking through these concerns can be problematic. Targeted and thought-out deployment of non-competes, after assessment of the actual potential harms each employee or employee group can pose, is the far better course of action.
Protect Only What You Actually Need to Protect, and Think of the Clearest Way to Protect It
The enforcement of a non-compete often comes down to the reasonableness of three inter-related factors: the scope of the restricted future activity; the geographic scope of the restriction; and the temporal scope of the restriction. The more narrowly tailored these restrictions, the better the chances for enforcement.
With respect to the scope of future activity restricted, many agreements suffer from what this author commonly calls the “janitor problem” whereby a high-ranking executive is restricted from going to work for a competing company. At first pass this may seem logical, but such a restriction would actually prevent a high ranking Coca-Cola executive from working for Pepsi as a janitor, something not likely to harm Coca-Cola. While this is an extreme illustration, the point is the future activity restriction should focus on how the employee can actually harm the existing employer and not go beyond that. Carefully drafted language regarding the scope of restricted activities at a competitor is far better than blanket restrictions precluding an employee from working for a competitor in any capacity.
Temporal restrictions are another key consideration. Courts often look with hostility to restrictions that go beyond a year, as the purpose of restricted time periods is to give a company time to identify a replacement employee and solidify any customer relationships. In unique circumstances agreements can be longer, but an employer will have to make a fairly robust showing why that length of restriction is necessary as to that specific employee. The shorter the length of the restriction, the more likely it is to avoid significant scrutiny.
Geographic scope can be the most difficult area for large employers or employers that reach customers dispersed around the country or the world through the Internet. For a single-site employer deriving its business from the immediately surrounding environs, geographic limitations are much easier to draw than for a multi-state, multi-national, or e-commerce employer, as courts tend to view restrictions covering the whole country or “anywhere an employer does business” as unfavorable. A better practice for a large employer could be to disregard geography and identify by name competitors from which the employee is restricted. Another approach might be to designate a restricted customer base if creating a narrow geographic scope is not possible or there is concern new competitors could spring up or the employee might form his or her own competing business. The more specific an agreement can be on where the employee can accept future employment, the better the chances of enforcement.
As mentioned earlier, there is no magic bullet to guarantee enforcement of a non-compete, but there are a number of practices (and unfortunately, too common practices) that guarantee a significant risk of non-enforcement. The best advice for employers using non-competes is to think about each agreement on its own rather than having a standard practice of having all employees, or all employees above a certain level, sign the same agreement. In approaching each agreement separately, wise employers will work their way through the kinds of considerations discussed above to put themselves in the best position to protect themselves from future harm from employees actually in a position to cause that harm.