Non-compete agreements: Are they enforceable?
BY JOHN PIKE
Once upon a time, company secrets, such as cutting edge manufacturing equipment and secret formulas, were housed behind locked doors. But today, technology companies’ trade secrets are often retained in the minds of company employees—which can’t be put under physical lock and key.
Not only is a company’s intellectual property (IP) burned into employees’ heads, but it can also be burned onto discs or dispatched to distant computers. The funneling of vast amounts of secret and important information to rivals, such as customer lists, pricing information or software codes, has never been easier.
The non-compete agreement (NCA) was created to fight this problem of unwanted outflows of information. However, the courts do not often enforce NCAs.
Judges nationwide commonly choose not to enforce NCAs because the general laws of commerce in this country abhor restraints on trade, particularly those limiting an individual’s ability to earn a living at their chosen profession. Employers looking to enforce an NCA in court must appreciate that the law of enforceability may be one level of protection on paper, and quite another in application.
Elements of a favorable ruling
Although individual states vary, four requirements must be met for an NCA to be upheld by American courts: they must be supported by adequate consideration; they must be reasonable in both geographic scope and time restriction; and must protect a legitimate business interest.
The requirement by the courts for adequate consideration is easily satisfied when the agreement is entered into upon employee hire. However, it becomes more difficult when the NCA is entered into after the employee starts working for the firm. The law requires there must be a benefit that corresponds to signing the NCA, or a beneficial change in the employment status other than continued employment (except in New York and New Jersey). A beneficial change can be a salary raise, a promotion with a change in duties, an adjustment from temporary to full-time work, a promise of commission revenues or an option to become a shareholder.
Another legal requirement for enforcing an NCA is that its geographic scope must be reasonable. Defining “reasonable” varies, depending on the particular company or line of business involved, the employee being restricted and the economic region at issue. The courts have not established a broad term for determining when a geographic restriction is reasonable, leading to seemingly inconsistent results. Sometimes the entire United States is reasonable, and other times 20 miles is considered too large. One guideline for a geographic area is that it must be specifically tailored to protect the interests of the employer without imposing undue hardship on the employee.
In the current global economy, some technological or knowledge-based professions could have national or worldwide NCA enforcement, especially with multi-national corporations. An example of this could be a former employee with secret knowledge of a patented drug manufacturer.
For the reasonable time frame of the NCA, courts have established two tests: one that applies to specifically protecting customer relations, and the other for protecting the employer’s investment in technology and training.
When an employee interacts with customers, a time restriction may be reasonable for the employer to hire a replacement for the position and provide the new hire with an opportunity to demonstrate his capabilities to the customers. For employees who did not deal with customers, the courts may examine the training and knowledge the worker acquired while employed. To figure out what is a reasonable amount of time, the courts may ask how long it will take for the employee to lose the competitive advantage that he gained at the company’s expense. For technology industries, the courts may look at the time period in which the employee’s knowledge or specialized training will become obsolete. Sometimes this can be two years or fewer because of the lightning speed advances in technology, where employees’ skills quickly become outdated.
For an NCA to be deemed enforceable by the courts, it must also protect a legitimate business interest. These include relationships with customers, employees with specialized training skills, proprietary confidential business information and trade secrets. Even without an NCA, the law often stipulates that employees have a duty not to misappropriate secrets or disclose confidential information.
New hires beware
Employees should sometimes be wary of the intention of company executives seeking an NCA. Especially during economically robust periods of high employment, firms may seek an NCA not to protect vital information, but rather to hinder their workers from seeking or obtaining jobs elsewhere. An NCA agreement could be nothing more than an employer’s effort to limit salaries, or an unjustified desire to merely limit competition. And sometimes companies will require employees to sign an NCA just because they can. Other times it is only a matter of ego, not competition, to prevent employees from working for competitors part-time.