An Overview of Non-Competition Agreements
Non-compete agreements are contractual agreements between employers and employees or independent contractors that restrict the employee/independent contractor from certain activities after their employment or working relationship has ended. Non-compete agreements may restrict an employee/independent contractor from working for a competitor of their former employer, starting their own competing business, soliciting customers of their former employer, or from working in a certain geographical area with a certain period of time.
As a general matter, non-compete agreements are used by employers who are concerned about former employees/independent contractors taking their valuable customers , or taking work or proprietary information learned through their employment to a competitor of the employer of starting a competing business of their own. Non-compete agreements may point to any of the following as a potential damage to the former employer: The sale of non-compete agreements is regulated by state law. Traditionally, a common law analysis was employed in which each non-compete agreement was analyzed under a reasonableness, or restraint of trade standard. While some states still employ this common law standard, other states have adopted specific legislation outlining the permitted scope and duration of non-compete agreements while requiring specific consideration be given for a non-compete agreement. In addition, new case law has been recently been handed down in some states that hold non-compete agreements unenforceable under certain circumstances. As a result, case law and statutory law may be used to determine whether a specific non-compete agreement is enforceable.
Fundamentals of Non-Solicitation Agreements
Key Components of Non-Solicitation Agreements
As mentioned earlier, non-solicitation agreements are intended to protect customer relationships and the business interests of the employer. A typical non-solicitation agreement will prohibit a former employee from contacting the former employer’s customers for purposes of soliciting their business. Depending on the nature of the employee-employer relationship, there may be other specific and detailed restrictions imposed by the employer for greater protection. Examples of these restrictions include: prohibiting the former employee from joining, forming or entering a competing company, appearing at trade shows with customer contacts, participating in trade associations or societies with customer relationships, participating in online chat rooms relating to customer industries, and requiring disclosure of all contacts with the former customer for a specified period of time following termination of employment. Other details that are considered for potential inclusion in a non-solicitation agreement are the scope of trade associations or organizations subject to the restrictions, circumstances surrounding when certain rights to customers will vest, time limits on the length of restrictions, geographic-based restrictions and the types of business that are prohibited.
Enforceability in the Courts
For a non-compete agreement to be enforceable, its terms must be reasonably limited in time and geographic scope. An employer must show that the agreement is necessary to protect a legitimate business interest. For example, in many states, non-compete agreements with employees who have access to trade secrets or confidential information are more likely to be enforced than non-compete agreements with employees who do not have access to this type of information. Similarly, in some states, courts have been more likely to enforce non-compete agreements with employees who hold senior level positions and have unique skills or training than with lower level employees.
The courts generally look at the type of employment and the time and the scope of restraint on competition. States differ in determining what restrictions are reasonable. There are also differences in how the law applies to employees versus independent contractors.
A distinction is often drawn between covenants not to compete and covenants not to solicit customers or co-workers. Non-solicitation agreements, which restrict former employees from soliciting customers, are generally not very controversial. Courts have tended to enforce these, provided that the time and geographical scope is reasonably limited. Non-compete agreements, on the other hand, restrict competitors from working in the same field, rather than working for a specific competitor, and thus are viewed as more onerous. The differences between the two types of agreements may not be substantial, however. Courts sometimes do not draw distinctions between the terms "non-compete" and "non-solicitation" when analyzing an agreement.
In addition, the law governing non-compete agreements varies considerably among states. Non-compete agreements are only enforceable in approximately half of the states in the U.S., and even those that will enforce non-compete agreements apply different standards. Although non-compete agreements were once considered enforceable in all but a few states, as the Supreme Court of California said in 1985, "The developing jurisprudence has made it clear that not every noncompetition agreement should be enforceable under the same standard."
When international companies enter the U.S. market, they should also consult with counsel about enforcement of their non-compete agreements under each state’s laws, in addition to any applicable international laws.
For Employers and Employees: Pros and Cons
Employers may look at a Non-Compete Agreement as an effective way to prohibit an employee from using information and contacts obtained while at their company from starting a competing business. For an employer, a properly drafted non-compete can be a great way to protect their intellectual property, as well as prevent key employees from taking valued clients and trade secrets to a competitor. Non-competes can also help a business focus its efforts on maintaining its existing trajectory, instead of having to look over its shoulder at what a competitor may be doing.
Some employers, however, find that restrictive covenants create havoc within its ranks. If an employer has long-standing concerns that key employees may leave, it may come to believe that all employees should be subject to the restrictions in order to keep them from leaving. Employers may forget that a non-compete is intended to keep a competitor from poaching key employees, not to keep key employees from going to other industries or elsewhere in the same field. As a result, some employers enter into agreements that may be overly restrictive, attempting to broadly halt competition that does not really exist.
The dangers for most employees are straightforward. Too broad a covenant not to compete may bar an employee from taking other employment, especially if that other employment merely is with a competitor. It may limit employee’s ability to start their own business. It may end up forcing the employee to move out of state or to invest a lot of money in litigation in order to get themselves freed from an overly broad covenant. The key here is proper drafting of the non-compete to make sure that it is reasonable.
If the agreement is by its terms not reasonable or if enforcement of the covenant would cause undue hardship to the employee, then those courts that will modify covenants in order to make them enforceable may rewrite the agreement to fit the circumstances. Many courts in many states find that the employer alone should bear the burden of clawing back money spent on an employee’s defense, and so will shift fees to the employer for enforcement actions. On the other hand, it is important for an employee to shed any nondisclosure obligations they may have had with the terminated employers in order to be able to compete. In some cases, the former employer may be looking to litigate, for example, patents that the former employee may have developed while with the company, so the prior employer may be looking to employ their lawyers on fees to block competition.
Crafting Bulletproof Agreements in Practice
The enforcement of non-compete and non-solicitation agreements in Pennsylvania generally requires that the employer clearly articulate its need for the restrictions, respect the temporal and geographic limitations that the law recognizes as reasonable, and narrowly tailor its non-compete and non-solicitation covenants to balance its legitimate business interests with the employees’ interests in being free to work in their chosen field of endeavor. The best way to ensure that your non-compete or non-solicitation agreement will meet these standards is to carefully draft it. This requires considering the scope of the restrictions, including territory and time, the nature of the business engaged in by you and the employee, the nature of the employee’s role, and any other circumstances that would help or hinder a bid for enforcement. Legal advice at this stage is always a good idea and is particularly helpful in ensuring that you understand and have addressed the balance of interests relevant to Pennsylvania law. When drafting your non-compete and non-solicitation agreements, be sure to include language discussing the justification for the restrictions and the purpose they are intended to serve . Ideally, this language should discuss the employer’s justification for the scope of the restrictions it is seeking to impose, as well as how those restrictions relate to the employer’s legitimate business interests and why they are tailored to balance the interests of employees and the restraints of the agreement. For example, when soliciting clients and employees is involved, the agreement should discuss the employer’s expectations concerning employee non-solicitation where an employee was privy to information about clients or prospects that could be used to gain a competitive edge in a bid to take business away from the employer. Likewise, where an employee had access to confidential information regarding other employees, the agreement should describe the circumstances and information available to the departing employee, the employer’s interest in preventing solicitation of employees, the potential harm to the employer by such solicitation, and the narrow tailoring of the restriction to prevent that harm.
Enforcing and Closely Scrutinizing Enforceability
To bring a claim for breach of a non-compete agreement, the former employer must show that the agreement is enforceable. As noted above, whether a non-compete agreement is enforceable may be challenged, often before the Company takes legal action, in a motion to dismiss, or through a motion for an injunction. In determining whether to enforce a non-compete restriction, the Court will look to the law of the jurisdiction in which the employee worked.
For example, where a Florida company entered into employment agreements with two employees in Michigan, and included non-compete agreements, under Michigan law the agreements were not enforceable. In that case the Non-Competition Clause was ruled "unenforceable because it was overbroad, not reasonable in terms of the restrictive period, and was not supported by consideration."
In another case a Michigan Court of Appeals found that a non-competition agreement was not enforceable in Minnesota because the former employee was not shown to have a special advantage. Employers who need to enforce a non-compete or non-solicit agreement on an out-of-state employee should consult an attorney familiar with the law in the state that the employee worked.
Employees challenging the non-compete agreement will most often argue that the restrictions are not tailored to protect a legitimate business interest. For example, they argue that the time period is too long to protect a legitimate business interest. An employee may be retained for a "new" non-compete restriction, however, the courts could find that the new restriction is unreasonable. Other claims are that the geographical area is not necessary to protect a legitimate business interest. Additionally, some employees will submerge other contractual obligations such as Confidentiality, Proprietary Information and Trade Secrets, with Non-Competition restrictions.
Enforcing non-compete restrictions is further complicated if the parties have entered into multiple written agreements. For example, courts have found that when a non-compete restriction is put in an employment agreement that states that the agreement supersedes all prior agreements it may be deemed a "repudiation" of the other agreements.
The courts have held that for covenants to be enforced, the employer must show: The court in Jeffrey Norton Corporation, in granting an injunction against a former salesperson determined that:
"We conclude that the covenants at issue here are reasonable. They are restricted as to place and duration. Further, plaintiffs had a very significant, legitimate business interest, in the form of assets going far beyond simple customer lists. Plaintiffs had, through many years of work, knowledge, information and good will with their customers, "created" those customers.
The court determined that it "awarded the defendant public policy in their favor. The public has an interest in protecting business assets, including customer assets, in a competitive economy. The public has an interest in preventing unfair competition, in not allowing individuals to be disloyal to the detriment of a prior employer and in not condoning breaches of confidentiality.
Recent Legal Changes and Trends
Over the past decade, a number of high-profile cases have cast doubt on the ability of employers to require post-employment restrictive covenants. Such prominent cases include EPA v. Engineered Product Supply. Co., 2008 U.S. Dist. LEXIS 26861 (N.D. Ill. Mar. 14, 2008), a case which received considerable scholarly analysis and comment, and the EEOC v. Amazon.com, Inc., 2015 U.S. Dist. LEXIS 160374 (W.D. Wash. Oct. 22, 2015), where the EEOC took the unusual step of suing a company far and wide, submitting numerous press releases, and expending considerable office resources in an effort to enjoin a non-competition agreement covering two employees. While the judiciary is currently more tolerant of noncompete agreements than it has been in recent years, it is clear that, across the country, judicial and legislative attitudes toward noncompetes have oscillated between extremes. Some states have trended toward greater restrictions on restrictive covenants.
In 2013, the Connecticut legislature passed Public Act No. 13-247. That Act provides that a noncompete agreement is unenforceable (1) if the employer "improperly uses its proprietary information to establish the justification for enforcement of the noncompete agreement," (2) the employer terminates the employment of the employee without establishing a legitimate business interest to justify enforcement of the covenant, or (3) "if the employer fails to provide a court any consideration in the event of a judicial rescission of the employer’s noncompete agreement." PA 13-247, §§ 1-3. Connecticut has also enacted laws limiting the ability of employers to require covenants restricting physicians and other medical professionals from practicing after termination of their employment. Conn. General Statute § 20-14f, et seq. (physicians and physician assistants) and § 20-99 (nurses and nurse-midwives).
In other jurisdictions, however, the judicial trend has been the opposite. In the past three years, judges in Illinois have upheld restrictive covenants by large health care providers, finding that the non-solicitation agreements were supported by consideration in the form of meaningful employment, and that a minimum period of employment for either one year or two years was adequate consideration. MHR Capital Partners, LLC v. Pres, 866 N.E.2d 311 (1st Dist. 2006); Advanced Inventory, LLC v. Bynum, 2014 IL App. (1st) 133560 (1st Dist., 2014) (six months sufficient consideration); TEG Paradigm Ventures, Inc. v. Xplore Technologies Corp., No. 12 C 9289, 2013 U.S. Dist. LEXIS 141879 (N.D. Ill. Sept. 30, 2013) (one year sufficient consideration); Roller v. Novartis Pharmaceuticals Corp., No. 11 C 6101, 2013 U.S. Dist. LEXIS 32763 (N.D. Ill. Mar. 6, 2013) (two years sufficient consideration); Aon Risk Services, Inc. v. Kulzer, 2014 U.S. Dist. LEXIS 68473 (N.D. Ill. May 19, 2014) (six months sufficient consideration); Prism Techs., LLC v. Puritan-Bennett Corp., No. 14 C 1090, 2014 U.S. Dist. LEXIS 153571 (N.D. Ill. Oct. 31, 2014) (one year sufficient consideration); and Butzel Long, P.C. v. Labuzan, No. 07 C 3101, 2011 U.S. Dist. LEXIS 47471 (N.D. Ill. May 2, 2011) (two years sufficient consideration). The key to enforcement in Illinois is persuasive testimony or evidence that the business made a significant investment in its employees so that more than two years’ notice would be required for its competitors to duplicate those efforts . See TEG Paragdim Ventures, Inc., 2013 WL 1751775 (citing Aon Risk Service, 2014 U.S. App. LEXIS 20554); but see Apex Sourcing Inc. v. Heir, 2014 WL 1978440, at *2 (N.D. Ill. May 16, 2014) (six months insufficient despite employer’s investment and training of employee).
The enforceability of such post-employment restrictive covenants based upon a non-compete/non-solicit policy is fairly new to many states. In contrast to the traditional rule that an employer must provide consideration to support each restrictive covenant, if such covenants are grounded in separate promises, many states now allow a single promise to serve as adequate consideration for non-compete/non-solicit provisions. Kane v. GOLDEN Rule Insurance Co., 972 F. Supp. 2d 1294 (S.D. Fla. 2013) (enforcing attorney’s non-compete agreement that contained both a non-compete and a non-solicitation provision that contained different terms); Peterson v. BCS Ins. Co., 2015 U.S. Dist. LEXIS 18462 (N.D. Ill. Feb. 16, 2015) (enforcing attorney’s non-compete and non-solicit agreements that provided for two years of post-termination compensation). For example, in a recent New York case, a New York State court granted an injunction to the plaintiff employer even though the defendants had worked for less than two years, based upon the fact that the non-compete/non-solicit policy was supported by incremental and continued employment over time. F.A.I.R. Health Inc. v. Curaden AG, 47 Misc. 3d 177, 180 (N.Y. Sup. Ct. New York Cty. 2014) (non-compete was enforceable although defendants had worked for less than two years because "[a]ny performance of work beyond the first three months provides, in addition to the continued employment, ongoing consideration for the restrictive language at issue. Where indefinite language is employed in non-compete and non-solicit policies, and the employment contract is indefinite, the earned consideration is measured by the entire course of employment, even if it is less than two years.").
Other recent trends include the continuing fees the Federal Trade Commission has focused on technology companies that have entered into noncompete or non-solicit agreements with their employees. See In the Matter of Mylan, No. 141-0199, • (F.T.C. Apr. 23, 2014). There, the FTC charged a pharmaceutical company with maintaining a "de facto ban on ’employee poaching’ by requiring its employees to agree not to hire other employees even after they have left Mylan. The drug company settled the FTC’s allegations in December 2014.
Similarly, in a joint Guidance document authored by the Departments of Labor, Justice, and Treasury after President Obama’s 2014 speech on the subject, much was made of the DOL’s plan to work with the National Labor Relations Board (the "NLRB"), the FTC, and state attorneys general to promote the prohibition of these agreements. It has become increasingly clear, however, that, while the NLRB may bring claims against companies it deems to have interfered with its employees’ rights under the NLRA to join together to improve the terms and conditions of employment, employers should not face action solely because they have required a non-compete agreement, as expressly cautioned by the NLRB in Reliable Remedies, 364 NLRB No. 83 (2016).