Businesses of all stripes rely on non-compete agreements (NCAs) to protect their intellectual property (IP) from former employees. However, innovation companies must remain vigilant in their use because state laws can vary widely regarding what to allow.
And some states give broad deference to countersigners to the point where they may not be enforceable as a feasible measure. So any corporate policies or procedures for NCAs that contradict the public interest will become null and void.
Non-Compete Agreements Defined
A non-compete agreement is a contract between two parties, usually a business and a former employee. Under the contract one party—usually the employee—agrees not to enter or start a similar profession or business in competition with another party—usually the employer.
“These were created to stop former employees from working for a competitor or starting a business utilizing confidential information about their former employer’s business,” says L. Julius Turman, partner, Constangy, Brooks, Smith & Prophete LLP. “If drafted too broadly, a non-compete agreement may prevent someone from working at all. Case law varies by state, but often permits enforcement necessary to protect company proprietary information.”
Protect All Valuable IP
And while the standard practice of IP protection commonly uses NCAs to encompass patent filings and trade secrets, much more exists in the balance. Other IP that should be covered by NCAs includes business plans, business practices, customer lists, pricing, marketing plans, new technology, operations, products, product development ideas, services and other proprietary information, according to legal experts. But if those agreements do not have teeth it will not matter.
For example, The Display Centre, a business that sells display equipment online, had an employee who signed an employment contract that included an NCA. He later quit and started his own concern in the same industry.
“He left our employment, opened an identical business within five miles and approached customers whom he knew through working for us,” says Chris Jones, director, The Display Centre. “Legal advice confirmed that the NCA was solid but that the cost vs. benefit of pursuing the individual was simply not worth it.”
Another point companies should consider when thinking about enforcing an NCA remains the effect it has on customers. They could come into play as potential witnesses, which can negatively impact your business development, according to Scott A. Mirsky, Mirsky Law Group, LLC.
“The opposing party can even subpoena your customers—and your customers’ documents—as part of the litigation,” Mirsky says. “When analyzing whether to file a lawsuit for violation of a non-compete, a business must analyze the legal and business ramifications.”
Time and a Place for Everything
One of the most egregious reasons that states make NCAs unenforceable remains the broadness of the agreements that for all practical purposes bans an individual from pursuing her profession of choice. For example, enforceable NCAs cannot have language that calls for a separated employee to have to sit out her chosen industry for an excessive time, according to legal professionals. And NCAs must remain rational and have a rationale.
“Most states will enforce restrictive covenants like NCAs so long as such agreements are reasonable in time, area and line of business,” says Micah J. Longo, employment lawyer, The Longo Firm, P.A. “An employer seeking enforcement of a restrictive covenant must prove legitimate business interests justifying the restrictive covenant. ‘Legitimate business interests’ can include employee training and operations that the employee learned during employment. Restrictive covenants not supported by legitimate business interests are generally unlawful, void and unenforceable.”
For example, a business seeking to enforce an NCA across state lines in a state where it does not operate will have a tough time getting any court in any jurisdiction to take its side, according to some attorneys.
“If you’ve signed a noncompete with your previous employer and you move to a state where it doesn’t conduct business, it will most likely not be enforced,” says Charles Vethan, Esq., founder and CEO, Vethan Law Firm. “To even have a chance at enforcing the agreement, your previous employer would need to prove that the agreement protects their legitimate business interest.”
Vethan goes on to state that NCAs must have gone into force as an ancillary agreement at the same time as an overall employment contract or as part of that main document. And the employer must give something of value such as specialized training or an ownership stake at the time of signing a promise not to compete post-employment. An agreement for “at will” employment or promise of a raise or promotion is not enough, according to Vethan.
However, sometimes NCAs remain completely moot. For example, in virtually all cases, California views the lion’s share of NCAs as void per state law, with some narrow exceptions for change of control of sole proprietorships, limited liability corporations and partnerships or dissolution of same, according to Vethan.
‘An Absolute Minefield’
So while on the one hand California gives nearly all the power regarding NCAs to former employees, other states take a more even-handed approach. Tech company innovators and other data-driven enterprises will find a friendlier if still restrictive legal environment in the South and Northeastern United States, according to legal pundits.
“Non-compete agreements? That’s an absolute minefield,” says Jonathan Pollard, competition lawyer and principal of Pollard PLLC, a Fort Lauderdale litigation boutique. “There is tremendous variation regarding the enforceability of non-compete agreements from state to state. It’s a spectrum ranging from California where non-compete agreements are considered illegal restraints of trade to states like North Carolina or New York where they are enforceable but subject to numerous exceptions.”
Other states like Florida allow for even more latitude on the strategies companies create to enforce NCAs, according to Pollard, but with more limited exceptions. But companies may not want to overreach and try to require more restrictions than necessary. Parties to such agreements seem to have put their faith in jurisprudence to sort things out. But if you try to pull an inside straight and the hole card does not fill the sequence, you can lose it all.
“Some people think they can just adopt an aggressive non-compete and the court will just narrow it if it’s too broad,” says Pollard, also a prior legal commentator with Bloomberg and PBS NewsHour. “Depends on the state. Some states will modify a non-compete that’s too broad. Other states will just throw out the non-compete entirely.”
Crossing into Delaware for Maximum Enforcement
For the most favorable jurisdiction for employers, some attorneys feel that Delaware offers the best venue with regards to NCA enforceability. This goes to its general reputation for allowing the most restrictive NCA covenants to survive scrutinizing, in their opinions.
“But these types of cases can go either way depending on their specific facts and the judge,” says Anna Aguilar, partner, Aguilar Bentley LLC, a boutique commercial litigation firm. “It can be frustrating for employers seeking to enforce them and for employees who want clear guidance on the viability of these provisions.”
For those proceeding under Delaware rules, Aguilar advises cognizance of four factors that the state considers in any NCA, specifically it must:
- Meet general contract law requirements
- Have reasonable scope and duration geographically and temporally
- Advance legitimate economic interests of the enforcing party
- Survive a “balancing of the equities”
“Draft provisions not overly broad and tailored to legitimate and specific employer concerns,” Aguilar says. “They should also contain clear statements about consideration given in exchange for restrictions.”
Do You Even Need a Non-Compete?
In the end, you may ask if you even need a non-compete. NCAs contain so many pitfalls that they may not have any worth.
“Consider whether a non-compete restriction is even necessary,” says James Wilson, general corporate counsel, PrimePay, a national payroll and HR provider to small businesses. “Will a more limited nonsolicitation clause barring contact of your customers for the purpose of selling a competing product or service suffice?”
And could non-competes possibly apply to minimum-wage workers? Most wouldn’t think so, but just in case, some states have moved to preempt them altogether.
“Illinois just enacted a statute that bars non-competes for employees earning less than $13 per hour,” says Peter A. Steinmeyer, member of the firm, Epstein Becker Green. “And other states, such as New York, are starting to closely scrutinize non-competes for low-wage workers.”