- Noncompetes are an important tool to help protect the legitimate business interests of a company, and it is worth the time and effort to do it right.
- What are the best practices to ensure the best chance of surviving regulatory and judicial scrutiny?
Excerpted from the recently published Ten More Things You Need to Know as In-House Counsel: Practical Advice and Successful Strategies Volume 2. The author, Sterling Miller, is a three-time general counsel, speaker, coach, and multibook author who writes the popular Ten Things You Need to Know as In-House Counsel blog.
For the last several years, noncompete agreements have been under attack in the United States by regulators, legislators, and the courts. For example, late last year, Massachusetts joined a number of states by enacting a law regulating noncompete agreements, including making them inapplicable to “nonexempt” employees. Courts do not favor noncompetes and will limit them or invalidate them completely. Regardless, noncompete agreements are here to stay, and businesses continue to rely on them as one way to protect customer goodwill along with confidential and proprietary information, which is why it’s important for counsel (in-house and outside) to take steps to ensure the noncompete agreements used by their clients have the best chance of surviving regulatory and judicial scrutiny. Here are some tips:
- What is a noncompete agreement? A noncompete agreement is a contract entered into by an employer and an employee whereby the employee agrees that if their employment terminates (usually for any reason), then the employee will not—for some period of time and within some geographic boundary—compete directly with or go to work for a company that competes directly with the employer. Most U.S. courts will enforce noncompete agreements if they are reasonable as to geography and time and there is a legitimate business interest at stake.
- Keep the group small. One controversial area is the extension of noncompete agreements to all the employees of a company, including administrative assistants and minimum wage workers. When reviewing a noncompete dispute, courts will review whether the employee has access to sensitive customer information and/or any other specialized or confidential information that could harm the employer if that employee started a competing business or went to work for a competitor. Tailor your agreement to the applicable employees and their particular circumstances.
- Keep the restrictions reasonable and narrow. Courts will review a noncompete to ensure it does not interfere with the public interest (as set out in state law/state court decisions) or impose an undue hardship on the employee. This analysis includes reviewing the noncompete agreement for reasonableness as to geography and time. If either is overly broad, the court will not enforce the agreement. For example, a worldwide, five-year noncompete is unlikely to survive. Your noncompete stands a much better chance if the restrictions are narrowly drawn to the minimum necessary to protect the company. A one-year noncompete, limited to the state/geography where the company is based/competes will likely withstand scrutiny.
- Provide consideration for the agreement. A noncompete, like any other contract, requires consideration to create a valid, enforceable agreement. If you require employees to sign your noncompete as part of their initial job offer, that is sufficient consideration. If you attempt to require an existing employee to sign a noncompete or else they lose their job, that is not sufficient consideration. If the agreement is part of a promotion, stock grant, special bonus payment, or similar offering, however, then the consideration element is satisfied.
- Get it in writing. Relying on common law rights around noncompetition versus a clear contractual obligation is playing with fire. All noncompetes should be set out in writing and signed by both parties. Include a provision that gives the employee time to consult with an attorney to review the agreement before a signature is required (including a place for the employee to initial that section).This will help with enforcement.
- Prepare multiple versions if necessary. Utilizing a single noncompete template is a bad idea unless your employees work only in one state or one country and work under similar circumstances; otherwise, be prepared to customize your noncompete template based on the laws of each jurisdiction where your employees work. Avoid using one template and finding out it’s unenforceable somewhere when you actually need to enforce it.
- Concede choice of law/forum. Choice of law and choice of forum should get extra attention. If enforcement of your noncompete requires the employee to travel long distances at their expense (time and money) or if it imposes the law of a state or country that conflicts with rights the employee enjoys where he or she lives, you can run into problems. Balance and reasonableness are key.
- Provisions to include. In addition to choice of law and forum, there are three basic clauses that you should include in every noncompete agreement:
- Injunctive relief. Include a clause that expressly provides for injunctive relief as a remedy in the event of a breach. This clause should also provide that if there is a breach, there is a presumption of irreparable harm and consent to injunctive relief.
- Attorney’s fees. Your noncompete should provide for an award of attorney’s fees and costs to the prevailing party.
- Savings clause. This clause provides that if a court should render any clause in the noncompete invalid, the remaining contract clauses survive intact.
- Use other types of agreements. Consider utilizing other types of agreements that might be less draconian than a noncompete but provide some of the same protections, e.g., nonsolicitation agreements (customers and employees) and nondisclosure agreements (protecting confidential information of the company).
- Be prepared to enforce it. Nothing puts people on notice about the consequences of violating a noncompete like knowing you will file a lawsuit to enforce it. If you are going to use noncompete agreements, be prepared to enforce them in court.