Ten Ways to Maximize the Enforceability of Non-Competition Agreements
We often hear business executives say, ‘Non-competition agreements are not really enforceable.’ Unfortunately, this common misperception may prevent businesses from taking advantage of these powerful tools. By understanding how the courts view non-competition agreements, and by tailoring non-competition agreements to address the courts’ concerns, employers can use these instruments to protect a variety of business interests.
Certainly, the legal standards that govern non-competition agreements can vary dramatically from state to state, and each individual judge’s willingness to enforce these agreements can also vary dramatically from judge to judge. Some courts enforce non-competition agreements as written; some courts ‘re-write’ them; and other courts refuse to enforce them at all. But, as noted, with careful planning, an employer can craft non-competition agreements that courts will be more likely to uphold in the states where the employer has employees.
To help maximize the enforceability of an employer’s non-competition agreements, we offer the following ‘Top Ten Tips’ on how to draft non-competition agreements that courts should be more likely to enforce.
1. Identify Your Protectable Interest. Courts will enforce non-competition agreements only if they are carefully drafted to safeguard employer interests that are protectable under applicable state law. Such interests typically include confidential information, trade secrets and customer goodwill. Generally, if a non-competition agreement seeks to prevent a departing employee from merely using general skills to engage in ordinary competition, then courts will not enforce the agreement even if there is no dispute that the employee signed the agreement and that he did so knowingly and voluntarily.
2. Develop Reasonable Substantive Restrictions. A non-competition agreement should be tailored to prohibit the departing employee from carrying out only those activities that would injure an employer’s protectable interest (as construed under applicable state law). To illustrate, a company that distributes computer chips to manufacturers and has no plans to expand the scope of its business may be hard-pressed to restrict a departing employee from distributing computer software to retailers. Although the departing employee would continue to work in the same general industry, his dealings with retailers of computer software would be unlikely to injure the goodwill that his former employer has generated among manufacturers of computer hardware. In this respect, taking the time to tailor each non-competition agreement can be key to maximizing the enforceability of the agreement.
3. Impose Reasonable Geographic Restrictions. There is no one-size-fits-all reasonable geographic restriction in a non-competition agreement. Some state courts have limited such restrictions to the area in which the employee actually performed services for the employer, while other courts have approved restrictions covering the entire market that the employer serves, even if that market is nationwide. Knowing the approach taken by courts in the applicable state(s) is critically important.
4. Impose Reasonable Temporal Restrictions. The temporal restrictions set forth in non-competition agreements must also be deemed reasonable (as defined by the law in the applicable state(s)) in order to be enforced. In many states, such as Massachusetts, temporal restrictions of one year are routinely upheld, and longer restrictions are allowed if warranted by the circumstances. For instance, in the sales field, a longer temporal restriction may be warranted and deemed ‘reasonable’ where the departing salesperson had developed and maintained key client relationships over a period of years on behalf of the employer, particularly if the market for the employer’s products and services is relatively small and highly competitive. Because courts carefully consider the specific facts and circumstances surrounding each non-competition agreement that an employer seeks to enforce, there is no ‘off the rack’ or ‘boilerplate’ time restriction that can be used reliably across the spectrum of jobs in the employer’s workforce.
5. Provide Adequate Consideration. Like any contract, a non- competition agreement is valid only if the employee receives adequate ‘consideration’ i.e., value in exchange for executing the agreement. In some states, initial employment is sufficient consideration, while in other states, it is not. Non-competition agreements that are not presented to the employee until after his employment has commenced can be challenging to enforce. In this situation, the employer may need to provide consideration above and beyond the wages and benefits to which the employee is otherwise entitled. The best practice for handling this situation may be to offer a significant bonus, benefit or promotion in exchange for the employee’s execution of the non-competition agreement.
6. Be Aware that a Promotion May Operate to Void an Existing Non-Competition Agreement. In a recent series of decisions in Massachusetts, existing non-competition agreements have been deemed void after the employees in question received significant promotions and/or changes in duties. These courts seem to be taking the view that, upon receiving a promotion, an employee would not reasonably expect an ‘old’ non-competition agreement to continue to apply. Thus, the courts required these employers to obtain new non-competition agreements supported by new consideration in order to restrict the post-employment activities of these employees.
7. Include a Strong Non-Solicitation Provision. In a handful of states, such as California, non-competition provisions are generally unenforceable on public-policy grounds. However, contractual restrictions on an employee’s ability to solicit or do business with specific former clients or to solicit or hire former co-workers are generally more likely to be enforced (because they impose narrower restrictions). Thus, even if the departing employee has a legal right to go to work for a nearby competitor, a non-solicitation provision may limit the harm that such employment would cause the employer’s business.
8. Include a Confidentiality Provision. If employees have access to trade secrets, business plans, customer lists or other confidential information, an employer should absolutely include a confidentiality provision in the employees’ non-competition agreements. Confidentiality provisions prohibiting the disclosure of confidential information are critical to enhancing the enforceability of other restrictive covenants. In this respect, confidentiality provisions are necessary to help establish that the agreement is needed to protect a legitimate business interest. (In addition, employers must safeguard the confidential information in question, both electronically and physically, such as by using password protections and locked file cabinets; otherwise, a court can determine that the information an employer seeks to protect is not actually confidential.)
9. Be Aware that Some Occupations Are Exempt. Many states, including, for example, Massachusetts, Delaware and the District of Columbia, have laws declaring non-competition agreements to be void as to certain occupations, such as lawyers, doctors, broadcasters and accountants. Employers should familiarize themselves with these laws to ensure that they are not considering requiring an exempt group of employees to execute non-competition agreements as a condition of employment.
10. Know Your Courts. As we have emphasized, crafting enforceable non-competition agreements requires an understanding of applicable state law. This includes knowing what approach the courts in a particular state are likely to take when asked to enforce these documents. Some courts will ‘blue pencil’ or ‘modify’ unreasonable restrictions and enforce the agreements as re-written. Others, however, will throw out the entire agreement if any portion of it is deemed unreasonable. By becoming familiar with the courts in the states where they do business, employers may make informed strategic decisions as to whether to approach non-competition agreements conservatively or aggressively.
Do not succumb to the misperception that non-competition agreements are not worth pursuing because they will always be deemed unenforceable by the courts. Although drafting and enforcing non-competition agreements can be challenging, particularly for employers that operate in multiple states, these agreements are an effective way to protect such business interests as customer goodwill and confidential information. We welcome any inquiries you may have about whether and to what extent non-competition agreements may be appropriate for your business.