Effective Use Of Non-Competition/Non-Solicitation Agreements In The Workplace

by Butler Snow LLP
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Few things can be more frustrating to an employer than spending significant resources training a new employee, allowing the employee access to trade secrets, and introducing the employee to customers, only for the employee to quit and accept a similar job for a competing business.  Non-competition/non-solicitation agreements can be valuable tools for employers to protect their trade secrets and mitigate the risk of being placed at a competitive disadvantage down the road.

Non-solicitation restrictions typically are used to prohibit employees (and former employees) from soliciting customers and employees for a competing business, and non-competition restrictions typically are used to prohibit employees (and former employees) from working for a competing business within a specific geographical area for a specified period of time after employment has ended.  Although these restrictive covenants are disfavored under the law because they impose a restraint on free enterprise, courts in most states will enforce them if the employer has a legitimate interest in the restrictions and the scope of the restrictions are not overly broad.  In addition to standard employment agreements, noncompetition/non-solicitation restrictions are frequently included in severance agreements, stock option agreements, and agreements related to the purchase of a business. 

Non-competition/non-solicitation agreements must be supported by “consideration.”  In other words, the employee must be getting something in exchange for agreeing to be bound by the restrictions.  Courts in most states recognize that an offer of employment to a new employee is sufficient consideration.  What about employers who want existing employees to sign such agreements?  Many courts find that the promise of continued employment is sufficient consideration provided that the employee remains employed for a reasonable period of time.  Otherwise, employers should tie in restrictive covenants as part of a promotion, increased compensation package, or similar scenario. 

The following three non-exclusive factors are generally taken into account when considering whether an employer has a legitimate business interest that would justify a non-competition/non-solicitation agreement:  (1) did the employer provide the employee with training that was specialized to the employer’s business; (2) was the employee privy to the employer’s trade secrets and other confidential information; and (3) did customers associate the employee with the employer’s business such that he/she essentially served as the “face” of the company?  Thus, an employer has a much more legitimate interest in imposing restrictive covenants on salespersons and senior level executives than on employees in the mail room.

If a legitimate business interest exists, courts will take a close look at the scope of the restrictions to ensure that they are appropriately tailored to protect those interests.  This generally entails scrutinizing the geographic scope of a non-competition covenant, as well as the temporal length of the restrictions.  There is no “one-size-fits-all” agreement, and instead, this is a case-by-case inquiry that will take into account a number of factors, such as the employee’s position and the scope of his/her duties for the employer.  For example, a state-wide, two-year restriction certainly would be overbroad for a hairdresser, but it might be appropriate for a salesperson.  Courts in most states are allowed to modify restrictions that are overbroad.  On the other hand, if an agreement is oppressively overbroad on its face, a court may determine that the agreement in its entirety is unenforceable.

In the event that a former employee breaches a non-competition/non-solicitation agreement, the employer may be entitled to monetary damages.  This could be in the form of compensation for revenue lost as a result of the former employee’s actions or a recoupment of the windfall that the employee retained as a result of the breach.  The employer may also seek “injunctive relief,” meaning a court order prohibiting the former employee from continuing to violate the covenants.  Often employers will rush into court and ask a judge to issue a temporary restraining order and/or preliminary injunction, which would immediately prohibit the former employee from continuing to violate the agreement until the court has had the opportunity to finally adjudicate the dispute at trial.

Employers should exercise caution when hiring an employee who might be subject to a non-competition/non-solicitation agreement with his/her previous employer.  There is a special law in Tennessee, for instance, that subjects a business to triple damages in the event that it induces someone to violate a contract.  Before hiring someone, it is always prudent to ask the potential employee if he/she is subject to a non-competition/non-solicitation agreement.  Employers should also ask new employees (as part of a new employment agreement or otherwise) to acknowledge in writing that they are not subject to any agreement that would interfere with their ability to perform their job.

Consulting with legal counsel can be helpful for drafting non-competition/non-solicitation agreements, discussing the enforceability of such agreements, taking action against former employees who might be disregarding their obligations, and hiring a new employee subject to such an agreement. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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