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.
Paper justice
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.