Traps for the Unwary: Employee Non-Compete Agreements

February 20, 2013

pic-employees-smUnfortunately, operating a business in America today involves navigating a legal minefield. Unexpected legal liability or expensive litigation can ensnare businesses that do know the law. And the law can be absurdly complex and counter-intuitive. In NSBA’s new “Traps for the Unwary” series, we aim to offer insight on a wide variety of subjects including labor, employment, occupational safety, tax, employee benefits, securities, business entity, intellectual property, immigration, federal contracting, contract and tort law. This series should not be construed as legal advice.

Non-compete agreements pose traps for the unwary in two distinct contexts: (1) when an employer enters into agreements with its own employees and (2) when employers are considering hiring someone who has signed a non-compete agreement with another firm.

A non-compete agreement or non-competition agreement is an agreement that imposes professional, employment or business restrictions on someone after a legal relationship ends.  The most common is an agreement between an employer and an employee governing what the employee may do after the employment relationship ends.  This discussion is limited to employee non-compete agreements.

Every state has different laws governing non-compete agreements and those laws can differ dramatically.  Some of these rules are statutory but more often they are established by courts through a series of decisions made over the years.  In California, for example, most employee non-compete agreements are unenforceable.  In contrast, many other states will enforce reasonable non-compete agreements.  All states that enforce non-compete agreements require that the restrictions they impose be limited in time, geography and scope.

Courts generally are most favorably disposed to restrictions designed to protect trade secrets, customer lists, other confidential information and goodwill.  Agreements imposing restrictions lasting more than two years will be problematic in most states.  Agreements that are not tightly limited geographically and that do not impose restrictions closely related to what the employee did for the employer are likely to be unenforceable.  Some states require that the employee receive additional consideration for entering into a non-compete agreement (beyond continued employment) if they are to enforce it.  In some states, courts will modify an agreement found to be overbroad.  In others, the courts adopt the “all or nothing” position that the agreement is either valid or invalid and if found invalid, all of its provisions are deemed unenforceable.  In other states, courts will only modify an agreement if the agreement itself permits it.  Some states will not enforce a non-compete agreement against at-will employees whose employment was terminated without cause.  Some states will not enforce non-compete agreements in certain professions (e.g. law, journalism).  Some states will enforce agreements against senior managers or other employees with special knowledge but not against ordinary employees.

If you plan to use non-compete agreements, it is vital that you learn the rules in your state. A business may want to consider a non-disclosure or confidentiality agreement rather than a non-compete agreement, particularly in states that narrowly circumscribe non-compete agreements.

Hiring an employee who has entered into a non-compete agreement poses risks for the new employer.  The former employer may sue the new employer for tortious interference with contractual relations (intentional interference with contract).  This tort has a long history and exists in most states.  Employers should ascertain whether or not an applicant has signed a non-compete agreement before they extend an offer of employment.  If they have, the terms of the agreement must be assessed in light of the prospective employees proposed duties with the employer in light of the relevant state law.  It may be, of course, that the non-compete agreement is simply not a problem (e.g. the two companies are in totally different fields, the new company is outside the geographical area designated by the agreement or the new job is totally unrelated to what the agreement protects).  It may be that the non-compete agreement is obviously not enforceable.  However, it may be that the non-compete agreement effectively bars the prospective employee from doing what the employer needs him or her to do and, therefore, hiring him or her would expose the employer to unacceptable risks of losing an expensive lawsuit.

Please click here to read Traps for the Unwary #1: Arrest Records & Employment.

Please click here to read Traps for the Unwary #2: Social Media Policies.

Please click here to read Traps for the Unwary #3: Selling Stock in your Company.

Please click here  to read Traps for the Unwary #4: Preserving Limited Liability.

Please click here to read Traps for the Unwary #5: Credit, Consumer Reports & Hiring.

 

For questions, please contact NSBA General Counsel David R. Burton at DBurton@nsba.biz.

NSBA cannot give legal advice with respect to specific situations.