Meticulous Legal Guidance is Essential for Non-Compete Agreements

Recently non-compete agreements have been a particularly hot topic. A recent New York Times Business Day article elucidates how non-compete agreements are no longer something that is the exclusive concern of CEOs, executives, lawyers, engineers and board members. Rather, the non-compete agreement is making its way to numerous positions throughout the service-based economy.  While the non-compete is certainly an effective means of protecting intellectual property when it is properly applied, non-compete agreements may be struck down by a court when they are unreasonable in their restrictions, when the restrictions do not serve a clear and articulable business purpose, or when considerations of equity dictate.

With more than 30 years of combined experience in transactional matters, business planning and commercial litigation the experienced attorneys of Maselli Warren, P.C. can guide your business through numerous legal challenges. Let’s take a brief look at the requirements of non-compete agreements, their benefits, drawbacks and the reasons why a one-size-fits-all approach is never advisable.

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The Basics of a Non-compete Agreement

Before we discuss specific non-compete agreements it is important that we first understand, in general, the reach and limitations of a non-compete agreement. Before we continue however, it is essential to understand that the validity of a non-compete agreement is a state law inquiry — meaning that the outcome is largely dependent on the jurisprudence in that jurisdiction. For instance, non-compete agreements are void almost entirely in both California and North Dakota but they are enforced regularly in Massachusetts. A non-compete can prohibit a former employee from joining a competitor or enjoin them from ‘poaching’ current clients. If challenged, a court is likely to inquire into several factors of your non-compete to determine its enforceability.

First, a restrictive covenant must be limited and reasonable in its geographic scope. What a reasonable geographic scope entails is a fact-dependent inquiry that takes into account the nature of the business and surrounding geography. Second, the duration of the restriction or restrictions must also be reasonable. Once again, the facts and circumstances unique to each situation determines what reasonableness is, but the courts in many states have been willing to enforce 1-2 year non-compete agreements. Another question that may arise is whether your former employee has joined an organization that is legally considered a ‘competitor’. Competitors typically sell the same goods or services as the company.

Finally even if the previously mentioned factors are all reasonable a court may yet decline to enforce the non-compete. A court may determine that principles of equity may dictate that the agreement should not be enforced. Further, a court could determine that for reasons of public policy the agreement should not be enforced. To better understand the public policy justification, consider a rural area where surgeons are especially scarce. A court is unlikely to prohibit one of the few surgeons in an under-served area from practicing. Even a well-crafted, reasonable non-compete agreement can be thwarted when unique and particularized circumstances.

Business contract

Non-Competes Are Now Prevalent Throughout Many Industries

While the legal, technological and sales fields have long been subject to the non-compete agreement, its expansion into service-industry jobs is rather unprecedented. Further the rapidity at which the agreements have become pervasive in the service industry is also rather shocking. The lede in the New York Times piece introduces the story of a 19-year-old college student who had a job offer to work as a counselor for a summer camp. At the last minute the offer was withdrawn due to fears of litigation due to the  non-compete agreement. The source of the student’s non-compete agreement? The 2013 employment contract for her job as a counselor at a Linx summer camp. When asked about the non-compete clause by the New York Times Linx’s founder stated, “Our intellectual property is the training and fostering of our counselors, which makes for our unique environment…You don’t want those people walking out the door.”

The article enumerates a number of other non-competes that have sprung up in non-traditional fields including:

        • Event planners are being asked to sign non-compete agreements to protect the company’s intellectual property such as the planning process that it has developed
        • Chefs are being ask to sign non-competes to protect corporate-engineered menus and processes
        • A Massachusetts man whose job required him to spray pesticides on front lawns was required to sign a non-compete agreement.
        • A non-compete agreement was required for an entry-level social media job.
        • A yearlong non-compete was required for a college junior who accepted an internship at an electronics company.
        • A hairstylist that was prohibited from working in any salon in nearby towns for 1 year.

two young colleagues arguing over paperwork in office

How Can Non-Competes Help an Economy? Why Might They Harm it?

There are proponents in favor of the enforceability of non-compete agreements and those who oppose them. Each side believes that their view is beneficial to the economy in that it creates jobs and allows for investment. Those who favor non-compete agreements admit that the agreements reduce the mobility of workers in the workforce. But they say, that reduction in mobility permits employers to invest more freely in employees because employees are less likely to leave the job. This training allows companies to refine their processes and be more efficient.

On the other hand, detractors of non-compete agreements say that the agreements inflict unnecessary economic hardship often without benefit. The article recounts the experience of Daniel McKinnon, hairstylist, who after being fired was enjoined from working at his trade for 1-year due to a non-compete agreement. McKinnon stated, “The salon where I worked was doing just fine — I don’t see why they needed to do this.” While living off of meager unemployment benefits McKinnon recounted, “I almost lost my truck. I almost lost my apartment. Almost everything came sweeping out from under me.” This legally mandated unemployment is hurting the economy and hurting American families.

Detractors also offer the rapid growth of California’s Silicon Valley over Massachusetts’s Route 128 as further proof that non-compete agreements and other restrictive covenants stymie growth. If an employee has an idea for a new product and service, they can pitch that idea to their boss or supervisor. However, if the supervisor passes on the idea and there is an enforceable non-compete agreement, the employee cannot move forward for at least the duration of the agreement. However in states like California where non-compete agreements are not enforced, the employee could become an entrepreneur by starting his own company.

Experienced Guidance Is Essential When Dealing With Non-Compete Agreements

As we can see from the above, non-compete agreements can have benefits for companies but the agreement must be one that is narrowly tailored and reasonable. This means that a one-size-fits-all approach is never advisable when it comes to restrictive covenants. A Maselli-Warren, P.C. attorney can assist your business in understanding how to appropriately apply non-compete agreements so that they are likely to be enforced and unlikely to be modified or stuck down in their entirety. To discuss your business’ legal needs call us at (800) 891-2657 or contact us online.