5 Attributes of a Successful Non-Compete Agreement

by JD Supra Perspectives

"Noncompete clauses are now appearing in far-ranging fields beyond the worlds of technology, sales and corporations with tightly held secrets, where the curbs have traditionally been used. From event planners to chefs to investment fund managers to yoga instructors, employees are increasingly required to sign agreements that prohibit them from working for a company’s rivals..." - The New York Times, Noncompete Clauses Increasingly Pop Up in Array of Jobs

After The New York Times and other media outlets reported recently that more and more employers are asking their employees to sign non-compete agreements, we asked JD Supra contributors who know about such matters to tell us: What is the one thing that a business's non-compete agreement should accomplish? Here is what we heard back:

1. A Non-Compete Agreement Should Protect Your Business's Property

"Property rights, whether tangible or intangible, are, after all, key business assets which courts recognize merit protection..."

From Jen Rubin, a member of Mintz Levin: "Protecting property should be the singular focus of a non-compete agreement. While this is easier said than done given the often imprecise concept of 'property,' the critical focus of a non-compete agreement is the vigorous and effective protection of business property rights. While not every state permits non-compete agreements and many states differ in their enforcement approach, the protection of property is, in fact, a unifying principle for all jurisdictions. Even California law, which prohibits non-compete agreements except in limited statutory circumstances, may restrict a former employee from engaging in certain post-employment activities if necessary to prevent the employee from using the former employer’s trade secrets – such as leveraging product or customer information for post-employment purposes. States with less restrictive approaches than California, such as New York and Connecticut, require a business to demonstrate the legitimate interest that a non-compete agreement must protect. There is no magic formula to protecting property rights of course – and that is why it is so critical to craft these agreements specifically to provide precise protection. Property rights, whether tangible or intangible, are, after all, key business assets which courts recognize merit protection."

2. A Non-Compete Agreement Should Be Limited to Previous Owners or Business Partners

"Applying non-compete agreements to employees with no ownership interest in a company other than common stock kills innovation and facile entrepreneurship that is the hallmark of American business..."

From Valerie Menager, special counsel at Carr McClellan: "A successful non-compete agreement should be limited to be enforceable against only previous owners or previous partners of a business. Applying non-compete agreements to employees with no ownership interest in a company other than common stock kills innovation and facile entrepreneurship that is the hallmark of American business. It also increases unemployment and makes it difficult for employees to advance in their careers because they cannot leave their current employers and pursue their area of expertise. Our intellectual property laws provide protection for innovations. Non-solicitation and confidentially agreements help prevent the theft and utilization of trade secrets. Let’s not put onerous restrictions on our work force that stifle their ability to contribute to the growth of our economy. There is a logical connection between California’s statutory prohibition against non-compete agreements and it being a vibrant locus of economic growth and innovation."

3. A Non-Compete Agreement Should Not Overreach

"...should be reasonable in substantive and geographic scope and duration, and fair to the employee."

From Caroline M. Austin, partner at Duane Morris: "Avoid the temptation to overreach by drafting a non-compete agreement that is broader than absolutely needed to protect the company – it is better to have a less restrictive non-compete that is enforceable as written, than an overly restrictive non-compete that is subject to attack and unenforceable, even if it can be blue-penciled to be enforceable. A well-drafted non-compete agreement should be reasonable in substantive and geographic scope and duration, and fair to the employee. But most importantly, the non-compete agreement should be clear and free from the need for interpretation. A vague non-compete agreement leads to disputes over the scope and duration of the non-compete, which in turn increases the cost on the company to enforce it or jeopardizes the company’s ability to enforce it."

4. A Non-Compete Should Acknowledge Limitations Under Applicable Law

From Craig Crawford, associate at Carr McClellan: "A successful non-compete agreement should acknowledge its limitations under the applicable law. In California, for example, non-compete agreements are void as to employees and independent contractors. Yet many businesses operating in California still include these boilerplate provisions in their employment agreements, often because they wish to avoid costly state contract variations or because they recognize the deterrent effect these provisions have. However, the risks associated with this practice outweigh its benefits. Not only does the employer risk a finding that the provision is unenforceable, but the employer also risks exposure under California’s Unfair Competition Law and common law business torts. By contrast, a California employer who acknowledges the limits or inapplicability of non-compete agreements may still protect its legitimate business interests associated with employee mobility through enforceable confidentiality agreements and non-disclosure agreements."

And, finally, very much related to the notion of limitations under applicable law:

5. A Non-Compete Agreement Should Not Be "One Size Fits All"

"...if a company wants to be able to enforce its covenants, it must identify what risks it wants to protect against, and then take on the project of tailoring the agreements to work in the different jurisdictions where it operates."

From Christopher Stief, managing partner at Fisher & Phillips: "Don’t fall into the 'one size fits all' trap. Today, with so many businesses operating on a multi-state or multi-national basis, the most important thing is to make sure that non-competes – or any sort of restrictive covenants – are appropriately tailored to the various jurisdictions where employees are located. Even companies that only operate in a handful of states in the United States often face meaningfully different requirements and laws for restrictive covenants. Different U.S. states have disparate approaches to key issues such as what is adequate consideration to an employee when signing a non-compete agreement. In North Carolina and Pennsylvania, for instance, courts traditionally have held that when giving a new covenant to an existing employee, the employer must provide adequate consideration beyond simply allowing the employee to keep working there next week. It can be a challenge to predict what might later be seen by a court as 'adequate'.

Yet the same company with similar employees in New York or in Florida could quite properly offer nothing in the way of consideration to an existing employee because in those locations, simple continued employment for a reasonable period of time after signing is sufficient consideration. Likewise, the basic approach in U.S. states ranges from California’s outright ban on most employee restrictions, to Louisiana’s demand for specific references to the Parishes in which it applies, to places like Florida and Georgia which have enacted statutes specifically designed by the legislature to enhance enforceability of such restrictions.

The same is true for multi-national employers. Mexico and India look a lot like California in their approach to non-competes. China, on the other hand, is more receptive, provided the company follows the requirements in the PRC’s Employment Contract Law of 2008, such as paying compensation during the restricted period. Compensation likewise is required under the laws of some major European Union jurisdictions, including Germany.

What does all of this mean? It means that if a company wants to be able to enforce its covenants, it must identify what risks it wants to protect against, and then take on the project of tailoring the agreements to work in the different jurisdictions where it operates. That doesn’t mean 50 agreements for 50 states, plus one for each foreign country. Many states and countries are similar to each other. But it does mean mapping out what types of restrictions will work in which countries. One size simply does not fit all."


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