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Author’s Note: With this article I am happy to continue a series I started 2½ years ago before the outbreak. I wrote the first 5 episodes of this 10-part series in early 2020, but then the pandemic hit and disrupted business as we know it. Recently, however, a national publication picked up and reprinted one of the articles in the series, prompting me to finish the series, so here are the 6.Th Text.
As we lawyers say, why should you be wary of your employees signing non-compete agreements or other restrictive covenants? After all, as most business owners know from headlines about restrictive covenant lawsuits in recent years, non-compete agreements have become the preferred way to protect employers in the business world.
When non-compete agreements are appropriate
There are certainly a number of circumstances when non-compete agreements are appropriate, even necessary. For example, you buy a retail business from an entity that has been in that business for many years. The last thing you want is for the seller to start a new company in the same line of business down the street from you. A well-drafted non-compete clause in the sales contract will protect you from that problem. Or imagine you are entering into an agreement to buy and sell a company’s product. You should include a restrictive covenant in your distribution agreement so that the company that distributes the products to the same geographic market as you does not want you to take advantage of the goodwill they have created to cut you off from sales.
When non-competition agreements create issues
Restrictive covenants in the world of work, however, present an entirely different set of issues. Although courts in most jurisdictions outside of California are willing to enforce restrictive covenants in employment agreements, a party seeking to enforce the restriction must prevail on the public policy that it is narrowly tailored to protect a legitimate business interest. Free and open competition, especially in the labor market.
A statement of that public policy became law a few years ago when the state of California passed a law allowing most non-compete clauses in employment contracts. But even though similar legislation has been proposed in several states, that hasn’t happened yet.
Limiting the ability of workers to earn a living
However, in most jurisdictions, restrictive covenants are more difficult to include in employment agreements than in employment agreements. One reason for this high limit is that enforcing noncompetes can limit an employee’s earning potential. For example, if a medical doctor with a narrow specialty in a geographic region has a covenant that prevents her from opening her own practice, she may have to uproot her family and move elsewhere in search of work. or work for another company in that geographic region. Furthermore, it cannot be ignored that many incomplete agreements are contracts of adhesion, with the only real options for the employee being to sign or be fired. Courts may consider employer-friendly language in the employment agreement as a balance.
Employees who do not have access to confidential trade or trade secrets
Another problem with the over-proliferation of restrictive covenants in employment agreements is that they are often imposed on employees who do not have access to or knowledge of their employer’s trade secrets or confidential business information, or who do not have the employer’s goodwill. The only legal basis for a non-compete agreement. If the employee loses access to the company’s confidential business information, imposing a restrictive covenant on that person can only be seen as a way to prevent legitimate competition.
A great example of this behavior came to light a few years ago when a woman in New York City reportedly tried to enforce a non-compete agreement on her dog walker so that it would not work for another dog owner. What is required to protect confidential information in this case? Again, the only legal basis for enforcing a restrictive covenant is to prevent an employee from harming a former employer by disclosing the employer’s legitimate trade secrets.
Finally, your employees are often your most valuable and valuable asset. It’s one thing to ask senior management and certain other key employees to sign a non-compete agreement that gives them access to the company’s most valuable confidential information and trade secrets. It’s another thing to impose unlimited commitments on employees, especially when existing employees are employees with no significant business relationship, not new hires. In such cases, the employer runs the risk of sending a message that he does not trust his loyal employees. In my experience, you’ll gain more loyalty — and productivity — from most of your employees by paying them fairly and finding ways to let them know you value their contributions.
Carefully limit the use of non-compete agreements
In general, an employer must carefully limit its use of noncompetes to essential employees. Otherwise, the employer will be involved in costly litigation with former employees, including claims that the former employer has no legitimate interest and the public interest will be harmed by enforcing the non-compete. A non-compete employer often goes to court with problems even though the employer has a legitimate interest in protecting it, which is why it’s so important to have a properly tailored limit. Moreover, because the restrictions it seeks to enforce are so broad, an employer who litigates and loses may feel emboldened by other similarly non-compete employees to violate them. The employer will have the burden of proving that the non-compete is enforceable, which will be expensive. Maybe it’s the money and the distraction, but then again, maybe not.
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