Employee Non-Competition Clauses: Questions of Enforceability

More documents

Recommendations

Info

Will the Courts Enforce Your Restrictive Covenant? Courts carefully review and interpret contractual provisions that attempt to limit a person’s ability to work or that impose a potentially unreasonable hardship on an employee. The enforceability of restrictive covenants varies from state to state. In California, non-compete provisions are illegal, and Massachusetts is moving in the same direction. Other states such as Ohio and New York, subject to certain limitations, enforce these provisions. Texas courts have been historically reluctant to enforce non-competition agreements; however, the Texas legislature has enacted the “Covenants Not to Compete Act” that makes noncompetition agreements enforceable provided there is strict compliance with all of the provisions of the Act. The laws in a majority of the states require that the restrictive covenants be reasonable in relation to the business interests of the employer. Reasonableness depends upon the specific facts of the particular case, but generally the following factors may be considered by the courts: • Whether the geographic limitations of the non-compete are sufficiently limited (e.g. nationwide is generally too broad unless the employee’s responsibilities were nationwide) • Whether the durational limits of the non-compete are rational (e.g. one year) • The scope of the activity to be restrained (e.g. sales of a particular product) • Whether the provision protects a legitimate business interest (e.g. trade secrets) • Whether a material change in the employment relationship exists that may void the agreement (e.g. substantial reduction in responsibilities/salary in merger/ buy-out) • Whether there is adequate consideration in exchange for the non-compete (e.g. monetary) Employers that develop a long-term strategy to retain employees have a significant advantage over rival companies and fewer concerns related to competition due to termination of employment. What Should Employers Consider when Drafting a Restrictive Covenant? Employers should pay particular attention to the proper drafting of any restrictive covenant included in an employment agreement. It’s best to have your company’s legal counsel assist in the drafting and review of any non-competition agreement to ensure that it suits the needs of your company and is enforceable under the intended state law. Companies should be mindful of the following factors when drafting a restrictive covenant: • Governing Law. State law determines whether a non-compete is legally enforceable. Courts generally apply the law of the state where the employee is performing services, despite the fact that a contractual agreement may maintain that another state law applies (i.e. state of incorporation or location of company headquarters). Non-competition clauses should be carefully drafted to strictly comply with the legislation established in the applicable state. • Reasonable in Scope/Non-Solicitation of Customers. As discussed above, courts are more likely to enforce the terms of your agreement if it is reasonable. The type of activity that is to be restrained should be limited to only those activities that are necessary to protect the legitimate business interest of the employer. Courts have consistently refused to enforce agreements that vaguely prohibit all competitive activity or prohibit employment in any capacity for a competitive entity. Courts are also likely not to uphold agreements that prohibit activity unrelated to the work the employee performed for the former employer. Prohibitions on soliciting an employer’s customers should be limited to established customers of the company. Additionally, narrowing the limitation on solicitation to customers with which the employee had substantial responsibilities is generally favored. • Geography/Duration. Courts are more likely to affirm a provision that is narrow in geographic scope as well. A reasonable geographic area of restraint is more favorably viewed if it consists of only the territory in which the employee worked for the former employer. If the duration of the non-compete is a shorter time frame, it is likely more enforceable – generally one year is reasonable. The duration of the restriction should also have some reasonable relationship to the time period the employee worked for the company. For example, an employee that is fired after one month is unlikely to be held to a non-compete that lasts two years. • Nullify/Reform. The importance of careful drafting cannot be overemphasized because many states will void an unreasonable restriction rather than modify it. For example, if a two-year duration is specified, and the court considers this duration unreasonably long, the court may nullify the restriction entirely rather than upholding it for a shorter duration. Courts can, however, modify or reform a restrictive covenant to narrow the scope or the geographical area of the agreement to make it enforceable. • Consideration. An employee should
LEGAL BRIEFS receive adequate consideration or a benefit in return for the restriction that he or she is agreeing to. A benefit at the initiation of employment may simply be the offer of employment. However, requiring an existing employee to sign a non-competition agreement will likely require an extra payment or bonus in addition to his or her salary as consideration. At-will employees cannot be required to sign a non-competition agreement without the employer providing some sort of independent consideration for the agreement. A benefit can be in the form of the employer providing confidential or proprietary information to the employee in return for the execution of a non-competition agreement. • Significant Changes in Employment Relationships. If an employer makes significant or material changes to its relationship with an employee, including reduction in salary or responsibilities or if the company has changed owner- ship, the employer may not be able to enforce the terms of a previous restrictive covenant. In such events, the employee ought to sign a new non-competition agreement with the employer, and adequate consideration should be provided to the employee for entering into the new agreement. It’s a common problem that employers forget to get or retain copies of a signed agreement; companies must implement a tracking and filing system for all signed employment agreements. Additional Protections Regardless of the jurisdictions in which they are located, companies need to look to additional provisions to protect their trade secrets and should not rely solely or even substantially on non-competition clauses. For example, employers that develop a long-term strategy to retain employees have a significant advantage over rival companies and will have fewer concerns related to competition due to termination of employment. It’s in the best interest of the company to also have employees sign, either separately or in conjunction with the non-competition agreement, a confidentiality agreement to protect the company’s confidential information and trade secrets. A confidentiality agreement will guard company and client trade secrets from disclosure to a third party and prevent use of such information by the employee except in the performance of duties for the employer. Although employment terminations are likely inevitable, it is advisable to protect yourself and your company by adopting restrictive covenants into your employment agreements that meet the reasonable standards generally upheld by the courts. Importantly, seek the advice of counsel to protect the most valuable assets of your company against former employees who solicit clients, directly compete against you or use your trade secrets or confidential information.
Page 1: LEGAL BRIEFS Employee Non-Competiti

Employee Non-Competition Clauses: Questions of Enforceability

Create successful ePaper yourself

Delete template?

Save as template?