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Non-Competes are Making a Comeback

By Eric J. Pritchard

Non-compete agreements in the United States (sometimes called “non-competes”) are making a comeback, and they’re no longer just for top executives or salespersons. Just a few years ago, legal and employment experts predicted the demise of the non-compete. A recent national survey, however, indicates that employers’ use of non-competes for all levels of employees are increasing. (One survey estimated that 1 in 5 U.S. employees were subject to a non-compete.) Perhaps more importantly, experts report that in today’s economy, non-competes are quickly spreading to blue collar workers. The increase represents a market-wide shift in which employers are increasingly asserting ownership over an employee’s work experience, even at lower levels.

A non-compete is just one type of employment-related restrictive covenants. Non-competes may not be for everyone, but savvy employers should use some form of restrictive covenants in all employment-related agreements. (The mere presence can dissuade employees from bad acts.) The types of covenants appropriate for a C-level executive or top salesperson differ from those for other employees. (In fact, all business contracts –whether among the company’s ownership or between the company and its service providers or affiliates – should include some, if not all of the restrictive covenants available to protect a company.)

A knowledgeable, experienced attorney can also help you decide whether some – or all – of the following provisions should be included in your agreements:

Non-compete clauses provide the highest level of protection but are the most difficult to enforce. The law disfavors restrictions on competition and that’s exactly what a non-compete is in the eyes of the law. Courts are reluctant to restrict a former employee’s ability to find work to support his family — even if the former employee decides to join on of your competitors. The duration and geographic scope of a non-compete clause must be narrowly tailored. You also can’t stop a former employee from competing in geographic areas where you aren’t operating. And the time period covered by a non-compete must also be reasonable.

State laws respecting non-competes vary but generally speaking, the shorter the duration, the more likely the clause will be enforced. You also need to comply with a number of other requirements of state law. For example, the promise of continued employment (i.e., the employee gets to keep her job) will support the enforcement of a non-compete with an employee in New Jersey but that same promise is not sufficient consideration to enforce a non-compete in Pennsylvania (in Pennsylvania, the employer must give the employer additional consideration like an increase in pay, benefits or a bonus). Likewise, some states enforce non-competes when the employer dismisses the employee while others do not, reasoning that in terminating the employee, the employer decided the employee is ineffective so why restrict their ability to compete?

Non-solicitation clauses prohibit parties from soliciting your existing customers. Courts are more likely to enforce these provisions because they specifically protect your ongoing customer relationships, an interest the law deems to be more protectable than the ability of a former employee to compete. Enforcement of non-solicitation clauses often depends on who solicited whom: did the former employee solicit the customer or did the customer approach the employee? As a result, consider including a non-acceptance clause for added protection.  These clauses are not always enforced but if you’re going to end up litigating a case against your former employee, give your lawyer as much to work with as possible.

Non-disparagement clauses prohibit employees from speaking critically of their former employer and offer more specific protection than defamation laws. You also probably want to include a non-interference clause, which, if enforced, prohibits a party from hiring your employees or doing work with your providers. These provisions are enforceable and can provide protection if a group of your employees decide to become former employees.

Non-disclosure clauses prohibit the disclosure of trade secrets including confidential information like customer lists. But keeping information confidential can be tricky. The information must not only be secret and provide a real competitive advantage, you also must take reasonable steps to protect confidential information from disclosure — even within your office.

Make sure the agreement also permits you to show the restrictive covenants to third parties like a new employer, a new partner or a provider or goods or services so that you can enforce the agreement. (If a third-party is on notice of the restriction continued participation in the violation of the restrictive covenant could impose liability on the third party, important leverage in resolving these sorts of cases.)

Litigation to enforce restrictive covenants may be more costly than other lawsuits. Generally you must seek an immediate injunction to stop former employees and their new employers from violating the restrictive covenants. Injunctions are extraordinary measures, and lawsuits seeking them must be filed immediately and are generally prosecuted on a fast track. Hearings are scheduled, depositions need to be taken, court papers filed, and documents exchanged and reviewed — all within a very short period of time. It’s like cramming a year’s worth of litigation into a few weeks.

Drafting restrictive covenants is not a do-it-yourself project. One size does not fit all. An effective restrictive covenant is highly technical. Courts don’t like these restrictions and often look for reasons to avoid them. Some states (California, for example) refuse to enforce non-competes. That’s true in certain other states, too. In states where restrictive covenants are enforceable, the covenants must be narrowly drafted to protect a legitimate business interest. They must also include specific components. Otherwise, they may lack the protections you are seeking (and thought you had).

For questions or more information on drafting restrictive covenants including non-compete agreements, contact Kleinbard partner, Eric Pritchard at epritchard@kleinbard.com.