Thursday, April 14, 2016

Are my non-compete agreements worth the paper they are written on?

A key employee has left or is leaving your business, and you have reason to believe they are going to work for a competitor, armed with vital information about your business and/or relationships with your customers.  Can you legally prevent this if you have a non-compete agreement with that employee?  The answer is “maybe,” depending on what you are trying to accomplish and protect with a non-compete agreement.

In Massachusetts, courts will enforce non-compete agreements if they are reasonable in time and geographic scope, supported by consideration, and only to the extent necessary to protect a legitimate business interest.  There is a lot packed into that sentence.

First, what is a “legitimate business interest” that can be protected through a non-compete agreement? This is one place where the words used by lawyers do not have the same meaning you might give them in everyday language.  For example, you might consider it perfectly legitimate to want to keep your competitors from employing someone you have invested a lot of time and money in training, but that is not enough, even though it has practical and very real consequences for your business.  In the eyes of the law, to rise to the level of a “legitimate business interest,” the harm you are trying to avoid must involve something more, such as the protection of trade secrets and confidential information and protection of the employer’s good will with its customers and prospective customers.  So, for example, a sales representative who has built up customer relationships over a period of years very well might be ordered not to compete for a period of time in order to protect your interest in the goodwill he or she has built up while working for your company.  In contrast, a back office employee with no access to confidential information or customer-facing responsibilities, however capable and important an employee, most likely would not be held to a non-compete agreement.

Second, non-compete agreements must also be supported by “consideration.”  This means the employee must receive something in exchange for agreeing to the non-compete.  You can ask a new employee to sign a non-compete as a condition of being hired, but if you want an existing employee to sign one, you should be prepared to connect that to something of value beyond simply keeping their job: a raise, a promotion, or even a one-time bonus or stock offering should be sufficient.

Third, what is “reasonable”?   It is important to remember that “reasonableness” depends upon the circumstances, and there is no bright line rule about how long a non-compete can last, or how far it can reach geographically, because both of those questions depend on whether the time or scope of the non-compete is reasonable in light of the interest the employer is seeking to protect.  So, for example, a nationwide non-compete might be found reasonable if the affected employee had a nationwide sales territory, while a 25 mile non-compete might be found unreasonable for a hair stylist, whose range of influence while employed was much smaller than that.

What does all of this mean? Because there are no bright-line rules, and every non-compete is analyzed on its own facts, it is difficult to be certain whether the agreement you ask your employee to sign will be enforced.  Below are some steps you can take, however, to maximize the chances that your agreement will accomplish your goals.

Do not use a boilerplate contract, at least not without having it reviewed by an employment lawyer- remember that a court will look at the agreement in light of the facts specific to your company and your employee, and using a “one size fits all” agreement could hurt you in that analysis.

Provide something in exchange for the non-compete.  If the employee is a new hire, make sure you are clear in the offer letter that signing the agreement is a condition of the job offer.  For an existing employee, you can tie the agreement to a promotion, a raise, or a one-time payment.  The amount does not need to be large- it simply has to be something of value.

Be careful about threatening termination if the employee does not sign.  The law is unclear on this point. Some courts have concluded that an employer has a right to condition continued employment on the execution of a non-compete; others have found this a form of “practical duress” that weighs against enforcement of the non-compete agreement.

Be consistent.  You do not need every single employee to sign a non-compete, but it is important that employees who are similar are treated similarly.  For example, if you are concerned about your sales people leveraging your company’s goodwill for a competitor, you do not need your mail clerks to sign non-competes, but if some sales reps have an agreement and others do not, a court may not believe that the company truly has an interest in protecting its goodwill.

Be reasonable.  The law will not prevent a person from working in his or her own field for longer than necessary to protect the former employer’s legitimate business interests, so it is worth taking care to identify the time period and geographic reach that accomplishes that goal without overreaching.

Consult an employment lawyer.  It should not take an attorney with experience in this area more than a few hours to gather the facts about your business and employees and draft an appropriate non-compete.  In contrast, a legal battle over a questionable non-compete can cost many thousands of dollars, with uncertain results.      

The lack of clarity in the law of non-compete agreements in Massachusetts has been frustrating to both businesses and employees, and every so often legislation is proposed to define more clearly what is and is not a legitimate post-employment restriction.  To date, none of these bills have passed, however, leaving all parties with little guidance about how to proceed.  In the meantime, we hope the above information is helpful to you in charting a reasonable course through these waters.

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