Non-Compete Agreements

Non-competition agreements are promises by employees to refrain from competing against their former employer for a time after their employment relationship ends. Non-competition agreements are cheap and easy for employers to get, usually by offering new or continued employment in exchange for them. Since most states permit employers to reject applicants or terminate employees who refuse to sign non-competes, employees usually have little choice but to accept them. Once an employee accepts a non-compete, it survives the life of the employment relationship and then lives on to restrict the employee from engaging in the same line of work. 

Although cheap and easy for employers to get, non-competition agreements are ruinously expensive for employees. They narrow career paths, block opportunities and force employees to stay in undesirable jobs. And they can effect third parties, like customers and patients, who might find their former hair dresser or doctor refusing to provide service or care, since under threat of non-compete litigation. 

Courts enforce reasonable Non-competition Agreements

Contract law requires courts to enforce clearly written contracts according to their terms. Contract law presumes that the parties look out for their own interests when bargaining, and agree only to acceptable terms. Consequently, courts will not review contract for fairness, and generally enforce them as written. In fact, contract law prohibits courts from rewriting ordinarly contracts, even if unfair. As a result, once employees agree not to compete against former employers, courts should enforce the restrictions, even if unreasonable or unfair.

Courts do not, however, enforce unreasonable restrictions against competition. Long ago, when a village had only one blacksmith, courts would not enforce the blacksmith's non-competition agreement at all, considering it a restraint on trade and against the public policy favoring competition. Much has changed since that time, though. Today, a mobile workforce in a digital economy creates opportunities for employees to compete unfairly against their former employers. Courts therefore now enforce non-competition agreements, but only to the extent necessary to protect the legitimate interests of employers.

Employer legitimate interests include protecting a customer base, trade secrets and an employer’s investment in training or educating employees. If restrictions prevent only ordinary competition though, courts will not enforce it. As a general rule, a restraint against ordinary competition remains against public policy.

Courts re-write Overly Broad Non-competition Agreements 

When a non-competition agreement protects some legitimate interests but also prevents ordinary competition, courts can enforce enforce only the restrictions that protect the legitimate interests. The process of striking illegitimate restrictions is known as “blue penciling,” which describes the pre-computer practice of manually crossing out terms on a piece of paper. Today, most non-competition litigation involves the extent to which the court will enforce restrictions, and not whether the court will enforce any restriction at all. If the court finds that an otherwise legitimate restriction goes too far, it will enforce that restriction, but only to the point necessary to protect the employer's legitimate interests.

Since employees can escape only those contractual restrictions that a court finds too restrictive, employees might win the non-competition battle but lose the non-compete war. For example, if a court struck a three year agreement not to compete as too long, but left the restrictions in place for two years, the two year restraint would still block most opportunities.

Employers can sue the new Employer/Competitor

When, as is typical, employees accept employment with a competitor, the employer can drag the competitor into the non-compete battle on a theory of tortious interference. There, the employer claims that the competitor induced the employee to violate the employee’s non-compete for improper reasons, or by using improper means.  As a result, many non-competition battles end before they start, with a stern letter from the employer’s attorney threatening suit against the competitor. Competitors faced with such threats often choose to avoid the litigation by withdrawing the offer of employment. This proves disasterous for the employee who left otherwise secure employment to go to work for the competitor.

Strategies for Avoiding Unfair Non-competes

Employees should first avoid agreeing to non-competition agreements in the first place. To borrow from Nancy Reagan, Just Say No. Although this is easier said than done given the need for a job, employees should, at a minimum, bargain with their employers against overly restrictive covenants against competition. Employees can argue that reasonable restraints are good for everyone, since neither party wants to end up in court.  From a tactical standpoint, negotiating also delays the creation of an agreement, and it could avoid the formation of one altogether. This is because proposing a counter-offer operates by law as a rejection of the employer’s initial offer. Unless the employer accepts the employee’s counter-offer, or the employee gives in and accepts the initial offer, the parties do not have an offer and acceptance, and thus did not form a contract.

If an employee has to accept an agreement with excessive restrictions, as is all too often the case, avoiding those restrictions is difficult, but not impossible, after the fact. These employees need the help of experienced non-competition lawyers, who can identify the legitimate interests, if any, that a court will enforce, and guide the employee around the enforceable restrictions. Attorneys can also predict with reasonable accuracy the cost of litigation and its likely outcomes, enabling employees to evaluate the benefits and costs of engaging in non-competition battle. Employees should consult experienced non-competition attorneys before they leave secure employment. Finally, when employees leave employment to compete against their former employer, they must not take any unfair advantage of their former employer. Once a court finds that employees helped themselves to the employer's trade secrets, like the password protected customer list, it has little patience for the employee's complaint that the agreement to avoid such behavior is too broad.

 

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Georgia Appellate Court Finds Non-Compete Incident to Stock Purchase Agreement Is Subject to Lower Degree of Scrutiny (American Control Sys. v. Boyce)

Citadel's Appeal Proves Unsuccessful In Extending Non-Compete Period (Citadel Investment Group v. Teza Technologies)

Iowa Appellate Court Addresses First Sale of Business Non-Compete Case In Over 70 Years (Sutton v. Iowa Trenchless)

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