Non-Compete Agreements and their Implications
A few generations ago it was common for a person to remain at their first job for a lifetime. If not that long, it was still common to stay at the same job for many years. But today people typically change jobs several times in their career. Sometimes there is a layoff; sometimes an individual employee is fired or quits.
Regardless of the reason, the employee is now looking for a new job. But if the employee had an employment contract with a Non-Competition Agreement (NCA) he may have a serious problem. Usually, an employer puts a NCA into an employment contract to protect its business. But sometimes an employer uses a NCA to prevent an employee from leaving, or just to be vindictive. We shall talk about both situations.
A NCA to Protect the Employer’s Business
Often a company has information or relationships that are essential to its business. Information, often called “trade secrets”, may be customer lists, manufacturing processes, sales techniques, research and, plans for future products or services. All these things have value to the company. They may even appear on the company’s financial statements as “Good Will”.
If a departing employee goes to work for a competitor and takes this valuable information with him it can be very costly to the previous employer. The departing employee may have trade secrets in his head. If the departing employee has personally serviced particular customers there is a strong possibility those customers will follow him to his new employer out of personal loyalty. A departing employee may even seek to hire away key employees from his old employer to go to work for his new one
It is perfectly legal for a company to protect itself by having a contractual agreement with an employee not to engage in certain conduct for a specified time after leaving, and this could apply if the employee quits or even if he were fired. However, a valid NCA must have two essential characteristics: 1) It must be specified in the employee’s contract, invariably a written contract. The company may require the contract when an employee is hired or later as a condition of continued employment. 2) The terms of the NCA must be reasonable in terms of protecting the employer’s business, often called a “protectable interest”.
There are three elements that make a NCA reasonable:
- Will the departing employee’s new employer be in competition with the former employer, providing the same or similar products or services?
- Is the new employer in a location where it is targeting the same customers? If both employers are hair salons across the street from each other they are targeting the same customers, customers the employee may have a personal relationship with. But if they are ten or fifteen miles apart, they probably are targeting different customers. On the other hand, if the old employer is Microsoft and the new employer is Google they are probably targeting the same customers all over the world.
- What is the duration of the NCA? If it is six months to a year it is probably reasonable because the information in the departing employee’s head will be fresh during that time. If the duration is several years or more it is probably unreasonable because in that time the information will become stale, of no value to the new employer, and not detrimental to the old employer.
There is another element that is often overlooked: Will the new employment of the departing employee really make a difference to the old employer’s business? The best example of this is where a cook at McDonald’s quits and goes to work for Burger King across the street. McDonald’s may have taught the departing employee a special way to make French fries, but Burger King already has its own way of making French fries and is not about to change. The departing employee may have a few personal friends who will switch from McDonald’s to Burger King just to see him when they go in, but that will not make any material difference to McDonald’s business. The essential fact is that customers go to McDonald’s because they want a Big Mac and they go to Burger King because they want a Whopper. It would be hard to find a court that would enforce a NCA against a departing cook at a McDonald’s.
A NCA to Prevent an Employee from Leaving or Just to Be Vindictive
Clearly, a NCA based on harming the employee and not reasonably necessary to protect the employer’s business, is not legal. The real reason may be to prevent an employee from leaving or even asking for a raise. On the other hand, the employer’s objective may simply be vindictive, since the NCA is usually written to be effective even if the employee is fired.
However, the employer’s lawyers will draft the NCA to disguise its motives, to make it look reasonable and therefore enforceable. Consequently, unless the employer chooses to ignore the NCA, things can get ugly and most employees will need the help of an employment lawyer experienced in dealing with NCA’s.
There are generally three ways the fight can play out:
- The employee can sue the old employer and ask a court to declare the NCA unenforceable.
- The employee can take a new job and wait for the old employer to threaten suit.
- The old employer can threaten the new employer with a suit for interfering with a contract, the NCA, between it and the employee.
If there the old employer threatens the new employer it will probably withdraw the job offer and that will end it. If the employee sues the old employer or if the old employer sues the employee, it is bound to be an expensive proposition and invariably the employer will have a lot more money to pay lawyers than the employee.
How Can a Lawyer Experienced in Dealing With NCA’s Help?
Before the Fact. A Non-Compete Agreement is a dangerous thing. Often an employee will not even notice it because it is buried in a much longer employment agreement. Therefore, it is critical when considering any written employment agreement that you consult the right lawyer, and right away. Ben Franklin was absolutely right when he said, “An ounce of prevention is worth a pound of cure.” If you are considering a written employment agreement call us. Maduff lawyers are experienced with employment agreements and the NCA’s often buried in them. We can frequently review a proposed employment agreement, meet with a client, explain the dangers, and suggest modifications, all in just a couple of hours. Our client can then go back to the prospective employer and negotiate a satisfactory deal on his own.
After the Fact. Once an employee with a NCA leaves his job, voluntarily or involuntarily, his situation may still not be hopeless. The best course of action is to negotiate an agreement with the former employer. The lawyers at Maduff Law are experienced at negotiating severance agreements with former employers (with NCA’s and without them). If you have a NCA our first step will be to analyze it carefully, looking for any holes. Then we will try to negotiate with the former employer. We may get the employer to waive the NCA, or at least modify it to be less onerous. If agreement is not possible, we can still advise a client on the best way to find a new job or start a new business that will avoid giving the former employer a good case against him.
When it comes to Non-Compete Agreements, acting quickly may be very important. If you have any questions or need legal advice, please contact us at Maduff Law.