Happy 2013! The Emplawyerologist kicks off the new year by continuing its new mini-series on restrictive covenants. Last week’s post provided an overview of restrictive covenants and key provisions. The burning questions for many employers, however, are, when are they enforceable? How broad can the restrictions be? What remedies are available to employers when employees violate their restrictive covenants, also known as “non-competes”? To review one point from last week: there are six states in which restrictive covenants are essentially non-enforceable, California, Colorado, Hawaii, Montana, North Dakota and Oklahoma. Many of the remaining states are what we call “blue-pencil” or equitable modification states, i.e. states that allow a court to make what we might see as minor edits to otherwise unenforceable provisions in a restrictive covenant rather than striking down the entire non-compete. Arkansas, Louisiana, Nebraska, Virginia and Wisconsin, while they will enforce restrictive covenants, are not “blue pencil” states, and do not allow equitable modification. Let’s assume for the moment that you do business in one or more states that will enforce restrictive covenants. What factors do most courts consider to determine whether they will in fact enforce the “non-compete”?
In general, courts require that restrictions contained in “non-competes” must be “reasonable”. Everybody knows what that means right? Not! So what determines if a restriction is “reasonable”? The answer to that question is “circumstances”. Now, I realize that answer does not seem too helpful either. The reason is because the analysis is what we call “fact-sensitive”. What is reasonable in one set of circumstances may not be in another. So what is an employer to do? Most states, either by statute or case law require that restrictive covenants be necessary to protect an employer’s legitimate interests, must not impose an undue hardship on the employee, and must not be unduly harmful to the public. Let’s break this down a bit:
What qualifies as an employer’s legitimate interests? Legitimate interests will include protecting trade secrets. (Click here to review the definition and examples of trade secrets). Protecting other confidential and proprietary information, or customer relations, will also usually qualify as a legitimate interest. An employee might argue that non-solicitation, non-disclosure or non-use provisions may be sufficient to protect an employer’s interests. If however an employer can show that the former employee will be unable or find it very difficult not to use confidential information while working for the competitor, then a court will likely enforce the restrictive covenant. The purpose is to restrict unfair competition.
Courts will not enforce a restrictive covenant that prevents fair competition. For example, a number of years ago, a local nursery school director asked me to draft a contract for her teachers that included a restrictive covenant. I asked her why she wanted a non-compete. She replied that she did not want her teachers to be able to just leave to work for another school, leaving her without a teacher. Did she have unique teaching methods in which she trained her teachers, that provided her school a competitive advantage over other nursery schools in the area? No. Was she worried the teachers would induce parents to enroll the children in the new school? Not really. Even so, would the list of children and their parents really be confidential information? Doubtful. Essentially the school director was looking to curtail what courts would call “fair competition”. Since time and space do not permit me to do so this week, next week I will discuss at least two cases that provide either an example of legitimate interests and unfair competition or specific factors considered in specific situations.
When will a non-compete place an undue burden on the employee? Employers should ask themselves if the employee can find other employment in his or her field despite the non-compete. If the answer is no, then the non-compete likely places an undue burden on the employee and will not be enforceable. How broad are the restrictions? For example, a restrictive covenant that forever bans the employee from working in the same industry throughout the United States, in most cases will be an undue burden on an employee, especially if all or most of his or her experience is in that particular industry. (Such broad restrictions are also likely to be beyond what is necessary to protect the employer’s legitimate interests.) While, admittedly, even the broadest restrictive covenants do not usually go that far, I do believe I have made my point! In terms of time restrictions, most states seem to hold that up to two years is presumptively reasonable. An employer seeking a longer restriction or a very broad geographical restriction that will severely limit an employee’s ability to work anywhere else in his or her field of expertise will need to show circumstances that justify such broad restrictions or otherwise be able to address the employee’s likely inability to find other employment in his or her field. There is at least one federal court case, from the District of New Jersey that addresses the question of whether/when a court can or should enforce a non-compete beyond the expiration of the time restriction. That too is in next week’s coming attractions!
When and how would a restrictive covenant be unduly harmful to the public? When the person provides a skill or has some other asset that is in demand, and rare, restricting his or her ability to work for a competitor might be considered unduly harmful to the public. For example, while courts often will uphold restrictive covenants against physicians, one with hard-to-find expertise in a specific area within oncology might have strong argument that holding him or her to a restrictive covenant would be injurious to the public. In many states, restrictive covenants against attorneys are not enforceable, due to a strong public policy in favor of allowing people and businesses the freedom to choose their legal counsel.
Mark this site and return next week and catch the next installment on restrictive covenants in employment agreements, which will include some real life court cases to illustrate how courts in different states deal with non-competes! Looking forward to “chatting” with you then!
Click here to learn more about Janette Levey Frisch, author of The Emplawyerologist.