Non-Competition Agreements can help a business retain valuable employees, protect its confidential information and customers, and prevent unfair competition. They can also be utterly useless.
While having a well-drafted, enforceable Non-Compete can be a source of significant value for many businesses, some are disappointed to discover that they have agreements that are unenforceable or otherwise inadequate. This article discusses some of the common mistakes that businesses make with Non-Competition/Non-Solicitation Agreements.
- The agreement is unenforceable because there was no consideration. One of the most common reasons that courts refuse to enforce Non-Competes is that employers make the mistake of obtaining the agreement from an already-hired employee without providing the employee with anything of value in return. Generally, such agreements are unenforceable because the employee did not receive any additional “consideration.” Essentially, this means that the employee did not obtain anything of value in exchange for his or her agreement not to compete. For a Non-Compete to be enforceable, there must be consideration, which is a legal term for an exchange of value. For Non-Competes obtained from newly hired employees, usually the agreement only needs to state that the employer’s willingness to hire the employee is the value exchanged for the employee’s agreement not to compete. For existing employees, however, additional consideration is required to make an agreement enforceable. When employers obtain Non-Competes with long-standing employees without providing anything of value in return, they are obtaining an unenforceable agreement. In many cases, the business is in a worse predicament than not having a Non-Compete, since it is relying on an agreement that is not legally enforceable. It is vital to provide additional value to an existing employee in exchange for the Non-Compete. This additional consideration could be more money, new job responsibilities and titles, new benefits, or a change from “at-will” to “contract-employee” status. While the additional consideration does not have to be of tremendous value, it must provide a real benefit that the employee was not otherwise entitled to receive.
- The agreement is unenforceable because it restricts competition for too long. Another common reason that courts refuse to enforce a Non-Compete is that the agreement restricts the employee from competing for an unreasonably long amount of time. For example, a court will likely refuse to enforce an agreement that prohibits an employee from competing for the rest of his or her life. In contrast, in many industries, a Non-Compete with a duration of 6-months will be considered reasonable, and therefore enforceable. The general rule is that the duration of the agreement should not exceed the time reasonably necessary to protect the employer’s legitimate business interests. What is considered “reasonable” varies from business to business, and requires a specific consideration of the facts and circumstances surrounding the agreement. This is one area where expert legal advice can be extremely valuable in creating an agreement with the maximum enforceable duration.
- The agreement is unenforceable because it restricts competition in an unreasonably large territory. Many Non-Competes are unenforceable because they restrict competition across too broad of a territory. Non-Competes usually describe a restricted area in which the employee cannot compete. Oftentimes this restricted area is determined based on a certain mile radius from employer headquarters or facilities, or by a list of towns or counties in which the employee is prohibited from competing. While these restrictions vary from agreement to agreement, the law requires the geographic scope of a restriction to be reasonable. While agreements that restrict employees from competing within a few miles of the employer’s headquarters are often enforceable, agreements that prohibit an employee from competing anywhere in the world are often (though not always) unenforceable. Like determinations of a reasonable duration for a Non-Compete, what is considered a “reasonable” geographic restriction varies from business to business. Again, legal advice that is tailored to your business, industry, and circumstances can be extremely valuable in determining the appropriate restricted territory.
- Using a one-size-fits-all approach. A Non-Compete that is good for one business or industry could be ill ill-suited for another. Likewise, a Non-Compete that is crafted for use with a particular employee might be counter-productive if used with another. It is a mistake to use a one-size-fits-all approach with Non-Competes. Unfortunately, some neglect this principle and develop Non-Competes from agreements used in other industries, or from something they find on the Internet. Such a one-size-fits-all approach risks creating a Non-Compete that is not well adapted to the specific needs of your business. Such an agreement might have a geographic or durational restriction that is unsuited to your industry, rendering it unenforceable. Additionally, a Non-Compete that is enforceable in one state might be unenforceable under the laws of another state. For these reasons (and numerous others), a proper Non-Compete should include specific consideration of your business’ needs and circumstances.
- Not getting a non-compete when you buy a business or the assets of a business. It’s happened, and it’s embarrassing. Sometimes an acquirer purchases a business without securing a Non-Compete from the selling company’s owners or key personnel, only to find it’s competing with the same people shortly after the acquisition. If the sellers of a business possess valuable customer relationships, know-how, or skills, a purchaser should consider insisting on a Non-Compete from the owners and key personnel.
- Not having a provision that allows you to assign the agreement. Another common mistake that surfaces when a business is sold is the failure to include an assignment provision in the Non-Compete. Basically, some jurisdictions do not permit the seller of a business’ assets to transfer its Non-Competes to the purchaser unless the employee consents to the assignment. This means that the purchaser of a business’s assets may not be able to enforce its Non-Competes without the employee’s consent. In order to avoid such a situation, a Non-Compete should include a provision that allows the employer to assign the agreement to a purchaser of the business.
- Not having a choice of law provision. It is critical that a Non-Compete appropriately addresses the issue of which jurisdiction’s laws will govern the agreement. An agreement that is enforceable in one state may not be enforceable in another. Likewise, a remedy for a violation of a Non-Compete may be a legal remedy in one jurisdiction but forbidden in another. This raises significant issues for companies that are engaged in business in multiple states. This is another reason why a one-size-fits-all approach to Non-Competes could harm your business. It is essential to ensure that your Non-Competes address the complex issues that arise from the various (often conflicting) state laws governing such agreements. This is another area where legal advice can be invaluable if it is tailored to your business’ needs.
- Not updating it. The circumstances of your business and the laws governing Non-Competes change from time-to-time. If these critical agreements are not updated or reviewed periodically, they risk becoming irrelevant to a business’ changing needs. Many things change for a business, including its essential employees, its key customers, and the information or techniques that it wants to keep confidential – this means that its Non-Competes need to change from time-to-time too.
- Thinking that, just because you have one, your problems are solved. While Non-Competes can be immensely valuable, they are not a cure-all. It is a mistake to think that such an agreement is the only thing that is required to retain valuable employees or protect your business’ confidential information. Employees can always choose to defy a Non-Compete and risk the legal consequences. A business’ confidential information can still be secreted away by an employee in violation of a Non-Compete. Non-Competes can make such actions more difficult, and the consequences more severe, but they rarely make such occurrences impossible. The reality is that retaining valuable employees and customers and protecting a business’ confidential information is a multi-faceted effort. As such, it is important not to think of a Non-Compete as a silver bullet or cure-all, but rather as one more tool in the toolbox. Such a tool, when used properly, can be of tremendous value to a business.
- Making sure the Non-Compete is in accordance with the law in your jurisdiction. The employee non-competition agreement landscape continues to evolve rapidly. Some states have enacted new limits on the use of non-competition agreements, such as Maryland and Virginia, which have banned non-competes for low-wage or hourly workers. In California not only are Non-Compete agreements unenforceable, but an employer who requires employees to sign them can be sued, even if the employer never tries to enforce the agreement. Furthermore, on July 9, 2021, President Biden signed an Executive Order on Promoting Competition in the American Economy (“Order”). Among other things, the Order encourages the FTC to use its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The FTC has not yet released any rules on the use of Non-Competes, and while an outright ban on Non-Competes is unlikely, it is important to check the current status of the law in your jurisdiction when entering into a Non-Compete as an employer or employee.
A business’s investment in its employees, customer relationships, and its confidential information is too valuable to leave exposed to unfair competition. The attorneys of MacElree Harvey can assist you in reviewing your Non-Competes, as well as in developing agreements tailored to the unique needs of your business. To schedule a consultation, contact Harry J. DiDonato at 610.840.0237, Robert A. Burke at 610.840.0211, or any member of our Business Law Team.
This article is informational only and not intended as legal advice. Speak with a licensed attorney about your own specific situation.