What is a Non-Compete Agreement?
Non-compete agreements are contracts in which an employee or a contractor agrees not to enter into or start a similar profession or trade in competition with the employer. It is a customary clause in employment contracts, but is generally not effective unless it is included in the contract.
An employer seeking to protect trade secrets and proprietary information will often ask employees to sign a non-compete in exchange for proprietary information or a special training program . The doctrine is, if the employee is going to have access to trade secrets and proprietary information, the employer will not disclose this information unless the employee commits not to disclose the information.
However, there must be an adequate consideration for a non-compete agreement and courts will not uphold a non-compete unless there is something of value that is given to the employee in exchange for signing it. A current employee may not be expected to execute a non-compete in order to receive a mere promotion, a raise or a demotion. This means that an employee will not have to sign a non-compete agreement until they have a valid, judicially enforceable reason to do so.
Legal Factors to Consider
A non-compete agreement must be reasonable in its restraint on the employee, or the activity restricted. In fact, an agreement not "reasonably necessary to protect the employer’s legitimate interests" is void in Florida. "The reasonableness of a non-compete agreement is determined by reference to three factors: "(1) whether the restraint is necessary to protect a legitimate business interest; (2) whether the remedy sought to be imposed by the restraint is no more restrictive than necessary to protect the legitimate business interest; and (3) whether the restraint is sufficiently limited temporally and geographically so as to do no more than protect the employer’s legitimate business interest." The inquiry is somewhat subjective and the law in Florida on the interpretation of Non-Compete Agreements is still evolving. Courts will consider the type of business that the employee was engaged in when considering the reasonableness of the restraint on the employee.
Duration: Florida law has historically allowed for non-compete restraints of up to five years as reasonable. Outside of Florida, courts have allowed non-compete restraint for longer terms, especially where the scope of the non-compete was very limited to to protect a customer relationship. Non-competes with a term of longer than 5 years may still be allowed, but will be subject to the reasonableness inquiry explained above.
Geographic Scope of Restriction: Florida law has a similar rule here where it allows for non-compete restraints up to a broad geographic area, usually the area where the employee worked. However, in some cases, a broader geographic area may be allowed if the employer can show a legitimate business interest supporting those locations.
Role of Lawyers in Non-Compete Agreements
Understanding Non-Compete Agreements: Insights from Expert Lawyers
Whether they are preparing them for their clients or advising on their legal implications, lawyers are often involved with non-compete agreements when an employee is asked to sign one. Lawyers will often be called upon to draft a non-compete agreement so that the agreement is "tailored" to the employees’ specific situation in a manner so that it will be enforceable under applicable law and that all aspects of the agreement have been complied with. For example, California is one of the few states that does not enforce non-compete agreements because they are contrary to public policy and so a company hiring an employee from California should not present the employee with a non-compete. Some states allow "reasonable" non-compete agreements, such as the non-compete agreement must be no greater than required to protect a legitimate business interest. Although it is difficult to determine what is a "legitimate business interest", many courts will look at whether the non-compete agreement is "narrowly" tailored. In other words, will the non-compete restrict the former employee in any way more than is necessary, under the facts and circumstances of the case, to protect their employer’s legitimate business interests? The definition of "narrowly tailored" is similar to "reasonableness" in that it will be difficult to determine and so it is important to tailor the non-compete agreement to the employee’s specific job duties and responsibilities. For example, if the employee will be working in a job capacity that will not put them in direct competition with their former employer’s product, why then would the non-compete restriction apply to that product, unless they had access to their former employer’s proprietary information? In that case the geographic scope should be limited to the area in which the employee worked. No court will find a non-compete reasonable if it finds the restriction is broader than necessary to protect the employer’s business interest. Lawyers will also be called upon to review and advise on the enforceability of non-compete agreements. After an employee has signed a non-compete agreement and has left their employment, a lawyer should be consulted to determine if there are any defenses to the non-compete agreement that the employee might have to avoid its enforcement. For example, what if the employee’s new workplace is too far away to interfere with the former employer’s business? Or suppose the former employer has failed to comply with the agreement in any number of ways, such as they continue to violate the employee’s rights as prohibited by law? Suppose the former employer did not properly inform the employee of the non-compete agreement at the time they were hired or make clear at that time what the consequences would be of signing the agreement? Lawyers are often called upon to negotiate non-compete agreements and we have represented clients both as a drafter and as a consultant to employers in negotiating a more favorable non-compete agreement for an employee who is being required to sign one by an employer. Although initially it may appear that the provisions in favor of the employer are pretty fixed, such as limiting the time that an employee can compete or prohibiting solicitation, there is often flexibility in negotiating what appears to be an "iron clad" non-compete agreement. For example, most commonly the time frames for the restrictions may be reduced, the scope of the restrictions would be limited to the area where the employee worked and the business interest that is sought to be protected, the restricted area itself could be eliminated or made less restrictive or the type of compensation arrangement intended for the non-compete itself can be added to the agreement.
Typical Issues and Disagreements
In addition to navigating the complexities of enforcing and demarcating the reasonableness of restrictions, several common disputes surround non-compete contracts. These include litigating whether the agreement in question is an employment contract or independent contractor agreement, enforcing contracts executed by companies that are not properly formed, the enforceability of contract provisions in the event of a corporate asset purchase agreement, and enforcing contractual or statutory notice requirements.
Disputes have arisen around whether an agreement is one for independent contractor services or employment. In some cases, some time before a relationship ends, an employer will ask the independent contractor to sign a non-competition agreement. However, the former independent contractor’s claim for benefits under the Workers’ Compensation Act, claim for unemployment compensation, or lawsuit against the employer for unpaid wages may subsequently end up in front of a judge. If this happens, an independent contractor’s agreement could be called into question and become moot, or have no legal effect at all, due to the Court’s finding that the agreement was one for services. In one case, an independent contractor signed an employment contract with a non-competition agreement but was later terminated. After the contract had been terminated, the employer sought to have the contractor sign an amended contract with a non-competition covenant. A dispute arose over whether the amended agreement could be enforced.
Another typical dispute occurs when a company is sold through a stock purchase agreement or asset purchase agreement. Often, a seller’s employees and executives will be asked to sign a non-competition agreement. For example, a buyer of assets or stock in a target company might seek a non-competition agreement from employees of the target company. When the buyer is not the same entity or at least lacks the same shareholders, members, or ultimate owners as the pre-existing company, courts have found that the non-competition covenant might not be enforceable against the seller’s employees after the sale, but may well be enforceable against the selling company itself.
Often, an individual will find job offers or employment opportunities with a competitor or industry while under an existing non-competition covenant. What makes the situation complicated is that frequently the new employer will want an assurance or agreement that it will not be sued, or that its business is not somehow in jeopardy due to an existing non-competition covenant. Perhaps more to the point, the new employer also often cannot afford the risk and expense of a lawsuit over the covenant. It may also be difficult for a competitor to find a separate employee. So what remedy is there, and how can the individual and the employer move forward with new employment, despite the non-competition agreement? If the employer contacts the old employer, that employer may be unwilling to permit an agreement that permits the individual to work. If, for example, the applicant is a surgeon and the old employer is a competitor, then the applicant will often simply lose out on the job. Even if the old employer consents, there’s often not enough money or time to put an agreement together. If the old employer is unwilling to release the applicant or renegotiate the covenant, then the applicant and new employer are often stuck with a choice of either proceeding into a lawsuit or walking away from the job opportunity.
Implications for Employees and Employers
The impact of non-compete agreements on employees and employers can vary greatly based on the stated terms, the nature of the business relationship, and applicable law. Given this variability, it is increasingly difficult to make general statements regarding the impact of non-compete agreements without taking these factors into consideration.
From the perspective of the employee, there are several factors to consider. Typically, non-compete agreements are entered into before the employee signs on or while they are performing in the position for which the non-compete agreement is executed. The extent to which an employee is aware of the restrictions imposed by the agreement at the time it is executed varies significantly. In many cases, the agreement is presented to the employee with little or no explanation of its provisions. Alternatively, an employee might have the opportunity to have advice from counsel before executing the non-compete agreement. When the employee does not have and appreciate this advice prior to execution, it may be difficult for the employee to fully realize the extent to which the employer will seek to enforce the provisions of the agreement and how these provisions will impact the employee during and after the employment relationship .
Employers may have substantial reasons for seeking to restrain an employee from working in a competitive industry after an employment relationship is over, or else the employer would not have entered into a non-compete agreement. However, the employer might fail to understand the implications of enforcing the agreement. Even if the employer is generally familiar with the provisions of the non-compete agreement and understands that it is very likely that a court could enforce it, the employer should understand how enforceability will impact the particular circumstances of the parties involved. For example, a non-compete agreement might not be particularly onerous on the employee if the employee can quickly find other work after leaving the employer. Conversely, if the employee is in a niche industry and would have particular difficulty finding another position that would not constitute a violation under the non-compete agreement, the employer might want to reconsider if it really wants to enforce the agreement.
Variances Across States
The laws governing non-compete agreements vary significantly from state to state, and some states are more favorable to employers seeking to enforce restrictive covenants than others. While California has long been a leader in limiting the enforceability of non-compete clauses, other states have begun to follow suit and recent data indicate that non-compete litigation is on the rise. States with new legislation or a trend away from enforcing non-compete agreements include Massachusetts, Rhode Island, Texas and New Hampshire.
Illinois has accepted non-compete law from multiple sources. It has adopted the common law while the Illinois legislature has passed legislation allowing for non-compete restrictions, so long as they are reasonable in scope and duration. Illinois courts will look to reasonableness when enforcing a non-compete agreement, the employer’s legitimate business interest(s), the hardship to the employee in honor of the agreement, the employer’s interests and its ability to adequately protect itself.
Under Massachusetts law, an employer seeking to enforce a non-compete must establish that it has a legitimate business interest requiring protection. Massachusetts does not recognize overprotective enforcement of non-compete agreements, but has adopted a three-factor test to determine enforceability. Courts will take into consideration the employer’s interests in addition to the employee’s hardship in light of the public interest. Recent Massachusetts case law has struck down non-compete agreements based on a lack of notice to the employee, holding that an employee must be given "advanced notice" prior to beginning employment in order to be bound by a non-compete restriction.
In 2019, Rhode Island passed a non-compete law limiting the enforcement of non-compete agreements made by employers, including but not limited to physicians, over the age of 18. The law limits non-compete restrictions to one year for all employees and lifts any existing language that prohibits the use of former employer’s intellectual property in future jobs.
Like existing non-compete legislation in Massachusetts, the Texas Disciplinary Rules of Professional Conduct prohibit restrictive covenants. Although these rules apply to attorneys, several national studies that track trends in non-compete litigation indicate that Texas is becoming more restrictive overall in protecting employees from potentially harmful non-compete restrictions.
New Hampshire has become increasingly hostile to non-compete restrictions in the past few years. A bill introduced in 2019 sought to reduce the duration of the non-compete restriction to just three months, moving the state ahead of its neighbors and closely mirroring the new non-compete legislation passed in Vermont. In 2018, the New Hampshire Supreme Court also adopted a rule barring restrictive covenants in attorney-client and fiduciary relationships.
Current Trends and Projections
In recent years, the enforceability and applicability of non-compete agreements has been at the forefront of broader discussions surrounding employee rights, interstate migration, wage growth, and innovation. Nearly every interviewee pointed to differing statutes and judicial focuses in each state as reasons for disparate enforcement and litigation regarding these agreements. However, the overarching trend has not been one of total elimination but instead focused on the understandable balancing between the goals of employers and their employees. Early in 2019, there was an increase in "bills targeting non-compete clauses," according to CNBC, and while "most of them didn’t pass," lawmakers showed a keen interest in differentiating restrictions based on a company’s size (bill would prohibit enforcement against employees making less than $100,000 annually) or the employee’s seniority (bill would limit the duration of post-employment non-competes to one year for employees making less than $50,000 annually). While none of the bills passed, their introduction demonstrates an unlikely retreat on these agreements but instead a move towards defining their effectiveness and enforceability based on context . Notably, the State of Washington signed a law effective January 1, 2020, which will limit non-competes to a maximum duration of 18-months for employees paid less than $100,000 per year and those paid less than $250,000 per year for non-pasted employees. Such changes may encourage states with more conservative trends to similarly limit non-compete agreements.
Employers should expect continued challenges to the enforceability and strength of non-compete and non-solicitation agreements as tech employees and other high-skill workers fight to keep such contracts to a minimum. The use of non-compete clauses is less common in the EU, although legislation regarding their duration and scope varies by state. Finally, as noted in my prior article regarding the Criminalization of Unauthorized Access to Computer Systems by Employees, there exist risks that state-level laws entrench tech employees into their alleged crimes as companies stand in the way of broad court orders. For example, in Sols. Arch., Inc. v. Lee, a court taping Yahoo! mail accounts of employees to "discover evidence of theft," requested by the computer forensics firm, ordered the employees to unlock their cellphones, creating a risk that the companies’ employees may have violated California Penal Code ยง 502(b). Recent trends suggest we should expect additional legislative focus on these issues within the next five years.