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Considering a Noncompete?

by: Carli Seeba

 

As the economy and employment rates improve, noncompete agreements are grabbing more and more headlines and seem to be on everybody’s radar.  What are they?  Do I need one?  How can I make sure what I write is enforceable?  These are all questions that we frequently get asked by employers. 

I’m sure many of you have hired your rockstar employee, only to see them go after considerable time and money, training the employee.  As a result of situations like this, more and more employers are looking to draft noncompetes to protect both their time and resources.  As with most areas of employment law, what’s allowed varies from state to state.  In fact, it would be impossible to write a noncompete that is applicable in all 50 states.  Which means pulling one from the internet is not going to protect you.

 

With the improvement in the economy, more employers are feeling pressured to have employees sign noncompetes.   Increased mobility and greater job opportunities give employees significantly more latitude than in recent years.  With the resulting rise in noncompetes, litigation over noncompetes is also on the uptick.  There has been 60 percent more litigation over noncompetes than in the past decade alone, making this an extremely topical issue. 

 

What is a Noncompete Agreement?

 

In an employment context, a noncompete is a contractual agreement between two parties where an agreement is reached not to enter or start a similar profession against the other party.  In other words, it is a document that restricts an employee or former business owner from competing in the same field.  It is designed to protect a business owner’s investment and interests. Typically, geography and/or a time frame is used to restrict the party from performing similar work.  Noncompetes are very specific outlining an exact length of time, geographic radius in miles, and the type of activity prohibited. 

In most cases, a noncompete is used either between an employee/employer or when a new business is purchased. Noncompetes are legal contracts and a type of restrictive covenant.  Even though the concept of a noncompete agreement was introduced hundreds of years ago, over the centuries they still hold an uncertain legal status. 

 

Do I need a Noncompete?

 

There are a few reasons employers favor having noncompetes.  Employers often seek out noncompetes because upon hiring an employee, considerable resources are invested.  Employers dislike spending time and money, training and hiring an employee, only to see them leave for a competitor after only a short time.  Noncompetes give an employee cause for consideration before flippantly jumping ship. 

Likewise, in the course of business, employees may learn trade secrets, proprietary information, and other vital data about the business which employers would not like to see go to a competing firm.   Noncompetes help protect the employer from having employees leave, take clients with them, and spread valuable information to competing firms. 

 

One important consideration when assessing whether a noncompete is right for you is to consider what industry your business is in and to which job any noncompete would be used.  If you work in the restaurant industry, is a noncompete really feasible?  Likewise, having a waiter sign a noncompete would be frivolous.  However, if you own a doctor’s office and are hiring a new pediatrician, perhaps a noncompete would be well-advised. 

 

What is enforceable?

 

So you’ve decided that you need a noncompete.  What do you put in it?  How do you make sure what you put in will be upheld?

 

As mentioned above, every state has different rules and restrictions for noncompete agreements.  In California, for example, noncompetes are usually unforceable, unless they fall into a very narrow exception.  Colorado will enforce management noncompetes to a point and Florida, on the other hand, has very broad noncompete rules.  When challenged, some states “blue-pencil” the noncompete—in other words, edit and tailor the agreement to make it enforceable.  However, other states will simply throw the whole document out.  It’s vital that if you are creating a noncompete, you consult an attorney or someone knowledgeable in employment law in your state in order to create a document that meets all your state’s provisions.  As with many employment law topics, the burden falls to the employer.  That said, there are a few general rules that are good to note.

 

First, there needs to be consideration when the agreement is signed.  For all the non-lawyers, consideration is needed to make contracts enforceable.  Boiled down to the simplest terms possible, consideration means you have to give something to get something in return.  For instance, when you purchase a house, the physical property is exchanged for monetary compensation.  In most cases, courts have said that the awarding of a job meets the bar for consideration.  However, if you are trying to introduce a noncompete to a current employee, some other form of consideration may be required such as a promotion or an additional benefit.  The courts are finding that consideration is ranging from 25 to 50% of an annual salary.

 

Secondly, noncompete agreements need to protect a legitimate business interest of the employer.    This does not mean employers can cite a need to restrict competition as a legitimate business interest.  Courts are more looking for arguments such as an employee knowing trade secrets and whether having a noncompete agreement would protect the business.  Courts would then require the employer to show that it took reasonable measures to keep the information secret and that the information gives the employer a competitive advantage.  Client lists are very difficult to make a trade secret – after all almost every client can be found either in a phone book or on a building. 

 

The third rule looked out is reasonableness.  Courts balance the employer’s business interests against the burden the noncompete places on an employee.  One of the first things looked at is duration and scope.  The shorter the agreement, the more likely a court would find it reasonable.  For instance, 6-months might be okay, but it’s unlikely that a limitation of ten years would be upheld.  Similarily, if the noncompete is to protect trade secrets, once the information becomes public, it becomes less likely that a court would uphold the noncompete.  Geographically, reasonableness depends if the restricted region is limited and competition would truly undermine a business.  This becomes very industry specific—news stations might have a much bigger geographical area then an accounting firm.  Additionally, noncompetes are often invalidated because employers include a geographical area where it does not do business.  Some states look at reasonableness and ask whether it is reasonably restricting an employee’s income and right to work.  When considering reasonableness, noncompetes need to be strictly tailored to each businesses industry, location, and market. 

 

The bottom line is that there is no one size fits all to noncompete agreements.  If you are considering a noncompete, please consult an employment professional to help assess whether a noncompete is necessary and what should be included.