Non-Compete Agreements: Friend or Foe?

by rgokli November 5 2008, 21:05

I. Introduction

In today's economic climate, the excitement of finding a new job can be overwhelming. Additionally, In the rush of starting work, it is easy to skim the fine print of a contract without fully understanding its terms. Non-compete agreements in employment contracts can cause much unnecessary hardship on an individual once that individual chooses to switch jobs. Additionally, while it may seem unintuitive that an individual cannot use skills learned at one job to advance his career at another job, many companies rely on non-compete clauses to limit just that. This article will discuss non-compete agreements generally, the history of non-compete agreements and the legal standards state courts use in examining non-compete agreements. It will then discuss how to enforce and contest non-compete agreements. Finally, it will conclude by giving advice for the employer or employee who is unsure about how to approach a non-compete agreement.

II. Non-Compete Clauses Generally

A non-compete agreement, also called a non-compete clause, restrictive covenant, or covenant not to compete, is essentially a clause used to restrict what an employee can do once that employee leaves his or her job. [1] The purpose of non-compete agreements is to preserve the interests of the former employer with whom the employee has signed the agreement. [2] "Non-compete clauses are used by established businesses to prevent employees from engaging in competition or appropriating confidential information for their own use or use by competitors." [3] They may also be used by start-up companies in order to protect lucrative information used or needed in the start-up of a that business. [4] Non-compete agreements can take the form of a clause in a larger agreement, like an employment contract, or can be a completely separate agreement. [5]

III. History of Non-Compete Agreements

Non-compete agreements have been around since the the 1400's. [6] "The first recorded noncompete case was brought in England in 1414, when a dyer of clothes tried to enjoin a former assistant of his from setting up shop in the same town." [7] However, as the "free transferability of property and goodwill became an important social goal", non-compete agreements were disfavored by courts in this same area. [8] There was a shortage of labor because many workers died from the Bubonic Plague and non-competes were seen as a barrier to craftsmanship and open trade. [9] Legal Scholars opine that courts did not routinely enforce non-compete agreements until the start of the Industrial Revolution. [10]

IV. Legal Implications of Non-Compete Agreements

The validity of non-compete agreements differs from state to state. [11] Some have held that non-competes are completely and always invalid. [12] Others have found that non-competes are enforceable in certain circumstances. [13]

Illinois is among the thirty two states (plus the District of Columbia) that allows non-competes to be enforced. [14]  Among the states that allow non-competes to be enforced, there are general rules that courts will follow. Applying the rule of reasonableness and the blue pencil rule are just two common methods employed by courts in determining whether to enforce a non-compete. [15]

The Rule of Reasonableness dictates that a non-compete must be reasonable in order to be enforceable. [16] Employers generally have the upper hand and can control negotiations between the employer and a new employee. [17] "Generally, management has much more leverage than employees in negotiating noncompete clauses. Restrictions on future employment usually arise at the beginning of an employment relationship, when employees have little bargaining power to resist these terms. Moreover, most employees do not seriously contemplate the possibility of leaving future employment at the outset of the relationship and, therefore are not overly concerned about specific terms that might circumscribe their future employment prospects." [18] Therefore, the courts in states that enforce non-competes have found it imperative to allow the employee to have an out when the agreement or clause itself is unreasonable. [19]

The "blue pencil rule" allows courts to change a non-compete agreement that is too restrictive in its original form. [20] The court may then enforce the  modified agreement. [21]

In states where non-competes may be enforced, courts will also look to the face of the agreement. [22] In particular, most well-written non-competes will specify geographic scope of the restriction, scope of services to be restricted and the duration of time the clause should cover. [23] "Non-compete clauses must protect a legitimate business interest of the employer, such as trade secrets, confidential information, and customer relationships." [24] To also protect the interests of the employee who is in search of employment, these three factors must be reasonable and not overreaching. [25] Additionally, recent Massachusetts cases have held that a non-compete agreement will be found invalid if the employer has changed job positions, increased salary, or changed bonus eligibility and the language of the agreement does not specify that it will still be valid under such circumstances. [26]

Alabama, California, Colorado, Delaware, Massachusetts, and North Dakota Have all held that non-compete agreements are completely and always invalid. [27] California, in particular, has a strong policy in favor of "competition and employee freedom." [28]

The remedy for violation of a non-compete agreement is either damages or an injunction. [29] Additionally, new employers may be held liable for hiring an employee who has signed a non-compete agreement with another employer. [30]

V. Economic Implications of Non-Compete Agreements

The overall economy of a state or region can be affected by the legal status of non-compete agreements. [31] The East Coast, for example, has lost many companies to California because of the tendency to enforce non-compete agreements [32]. California, which does not enforce non-compete agreements, has seen a huge increase in industry. [33] Bijan Sabet, a partner at a Venture Capitalist firm explains, "If you look at California, there are a lot of startups created from alumni of successful and unsuccessful companies. [34] Many of these entrepreneurs came from companies that we would call competitors to their new thing. [35] How many people are at Google that used to work at Yahoo? How many folks are at Apple that used to work at Microsoft? Where did the earliest Apple employees come from? How about the founders of Intel?" [36] Sabet goes on to explain that California's policy against enforcing non-competes lead to the rise of Silicon Valley as a leader in the technology industry. [37]

VI. Enforcing and Contesting the Valid Non-Compete Agreement

If an employee finds himself in a situation where he has found a new job, but signed a non-compete agreement with his prior employer, he may still be able to take the new job. [38] The employee should generally not disclose the existence of the non-compete until later in the interview process, when the potential new employer has expressed a strong interest in the job candidate. [39] That way, the employer will be more likely to work with the employee to find a way to hire him. [40]

Additionally, dealing directly with the former employer is a good way to calm fears. [41] "Once the employer is satisfied that you won't use inside information to compete, they are a lot less likely to sue to enforce your non-compete clause. Since non-compete clauses are becoming more common, more employers are open to taking this step to avoid litigation." [42]

VII. Conclusion

The existence of a non-compete agreements can make or break an individual's career. If a non-compete agreement is found to be valid, an employee may find himself looking for work in a new field. However, if the employee takes steps before signing the non-compete, such as making sure it is narrowly tailored, it will be less likely to interfere with the employee's next job search. Additionally, before signing any contract, including a non-compete agreement, an employee should consult with an attorney who has the appropriate specialty.

[1] Mansfield Tanick & Cohen P.A.: Will Your Non-Compete Agreement Stand Up in Court?, http://www.mansfieldtanick.com/CM/Articles/Will-Your-NonCompete.asp (last visited Nov. 3, 2008); Sandra S. Benson, Recognizing a Litigation Reality: Safeguarding Against Unfair Competition and Tortious Interference, <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --> The CPA Journal, Nov. 2007, http://www.nysscpa.org/cpajournal/2007/1107/essentials/p56.htm.

[2] Monster.com: Everything You Need to Know Before you Sign a Non-compete Agreement, http://midcareer.monster.com/articles/movingout/noncompete (Last Visited Nov. 3, 2008).

[3] Mansfield Tanick & Cohen P.A.: Will Your Non-Compete Agreement Stand Up in Court?, supra note 1.

[4] Id.

[5] Monster.com: Everything You Need to Know Before you Sign a Non-compete Agreement, supra note 3.

[6] Matt Marx, The Power of the Noncompete Clause, <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --> Hbs Working Knowledge, Feb. 26, 2007, http://hbswk.hbs.edu/item/5628.html.

[7] Id.

[8] Benson, supra note 1.

[9] Marx, supra note 6.

[10] Id.

[11] American College of Foot and Ankle Surgeons: The Facts About Non-Compete Clauses, http://www.acfas.org/practicemang/managedcare/noncomplete.htm (last visited Nov. 3, 2008).

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Lawyers.com: Non-Compete Contracts, http://labor-employment-law.lawyers.com/employment-contracts/Non-Compete-Contracts.html (last visited Nov. 3, 2008).

[17] Id.

[18] Mansfield Tanick & Cohen P.A.: Will Your Non-Compete Agreement Stand Up in Court?, supra note 1.

[19] Lawyers.com: Non-Compete Contracts, supra note 16.

[20] Id.

[21] Id.

[22] QuintCareers.com: Quintessential Careers: Dealing With Non-Compete Clauses and Agreements by Randall S. Hansen, http://www.quintcareers.com/non-compete_clauses.html (last visited Nov. 3, 2008).

[23] Id.

[24] Id.

[25] Id.

[26] C. Max Pearlman, Changing Conditions Can Void Non-Compete Clauses, <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --&gMass High Tech, Oct. 2004, http://74.125.95.104/search?q=cache:wV3PMRLtG04J:www.swmlawfirm.com/CM/Notable/swmlawyers1011.pdf+mass+high+tech+changing+conditions+can+void+non-compete+clauses&hl=en&ct=clnk&cd=1&gl=us&client=firefox-a.

[27] Lawyers.com: Non-Compete Contracts, supra note 16.

[28] Bob Egelko, State Supreme Court Rejects Noncompete Clauses, <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --> SFGate.com, Aug 8, 2008, http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/08/07/BAUH12716R.DTL&tsp=1.

[29] Lawyers.com: Non-Compete Contracts, supra note 16.

[30] Lawyers.com: Non-Compete Contracts, supra note 16.

[31] Xconomy.com: Spark Capital's Bijan Sabet Says Cross out Those Non-Compete Clauses- An Xconomy Interview by Wade Roush (last visited Nov. 3, 2008).

[32] Id.

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Id.

[38] QuintCareers.com: Quintessential Careers: Dealing With Non-Compete Clauses and Agreements by Randall S. Hansen, supra note 23.

[39] Id.

[40] Id.

[41] Monster.com: Everything You Need to Know Before you Sign a Non-compete Agreement, supra note 3.

[42] Id.

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