Non-compete Agreements

It sounds rudimentary ' and it is ' but careful review of the applicable agreements is often overlooked. In Massachusetts as in most other states, non-compete agreements will be enforced if they are reasonably limited in duration and geographic reach, supported by consideration, and narrowly tailored to protect only the company's legitimate business interests. Although different states vary in terms of how they will treat overly broad or vague language, they pretty much all agree that the language of the agreement will be construed against the employer. Accordingly, proper planning and drafting of a non-compete agreement is critical to its eventual enforcement, and thus a careful review of the agreement at the time a conflict arises is critical.

2. Know What You Are Protecting

Notwithstanding their name, non-competes do not protect against simple competition. Nor do they prevent someone from using their ordinary skills and knowledge ' even if gained while on the job. Rather, non-compete agreements protect only “legitimate business interests.” Those interests vary by state, but generally include the protection of goodwill, trade secrets, confidential information, and special training. A thorough understanding of the particular company assets at issue is essential.

3. Interview the Employee

Whether an employee has given notice that she is leaving or a new employee is being hired from a competitor, it is critical to understand the implications. Exit and pre-employment interviews provide much of that opportunity. The information garnered from such interviews will inform many of the decisions down the road. Even where a departing employee refuses to reveal her post-employment plans ' or lies about them ' the interview is still worthwhile as, among other things, it will remind the employee of her obligations and give ammunition to lawyers charged with enforcing the agreement.

4. Don't be Myopic

To focus exclusively on the non-compete agreement is to miss the forest for the trees. The non-compete agreement is but the starting point. The employee's role at the former employer in comparison with the role at the new employer is the ultimate crux of the analysis. Only when an employee will be placed in a position to threaten the former employer's legitimate business interests will an otherwise-enforceable non-compete be enforced.

5. Don't Forget About Other Options

Even in the absence of an enforceable non-compete agreement, there may be options. For example, if the case involves the theft of trade secrets, most states ' including even California ' have laws that protect the employer from loss of its intellectual capital.

6. Find the Guilt

Enforcement of a non-compete agreement is an equitable matter that lies within a court's discretion. As the old maxim goes, “He who seeks equity, must do equity.” If a court believes that one party has acted unfairly or otherwise wrongfully, the court is more likely to try to help the other side when deciding whether or not to exercise its equitable powers. Accordingly, it is important to investigate the behavior of all of the potential parties to a dispute: the employee, new employer, and the former employer. Finding, that the employee e-mailed confidential information to his home e-mail address on the last day of employment is a fact that will auger well for the enforcement. That said, a critical mistake often made in this regard by companies seeking to enforce their agreements is failing to take stock of their own failings. For example, overlooking the fact that the former employer deceptively obtained the non-compete agreement will be fatal to any chance of its enforcement.

7. Know Thine Enemy

No proper strategic decision regarding whether or how to enforce or defend against a non-compete agreement can be made in a vacuum. You must learn what you can about the opposing party or parties, including how much of a fight they are likely to put up. A failure to perform this simple due diligence leaves you incapable of making the best decision possible under the circumstances.

8. Consider the Possible Ramifications

Before taking any action, consider your exposure. It is not uncommon for a lawsuit to be initiated by companies seeking to enforce their rights, only to be met with a counterclaim that has greater merit than the initial lawsuit. For example, an ill-conceived complaint could very well be met with a valid claim for tortious interference with business relations and unfair competition (which can result in an award of multiple damages and attorneys' fees).

9. Beware of Conflicts

There are two types of conflicts that arise in the context of non-compete agreements that are frequently ignored until it's too late. First, although the interests of the employee and new employer are generally aligned, they are not necessarily coextensive. Whenever possible, it is best to have separate counsel for the employee and the company ' particularly, as the party on the other side will do its best to exploit any potential conflicts if the two are jointly represented. Counsel for the employee and new employer can and should, however, work closely together, and typically one takes the lead, with the other simply ensuring that the other client is properly protected. The second type is the conflict of laws. When the agreement is to be enforced across state or international borders, the laws of that jurisdiction must be considered as well, as courts will not enforce agreements that are repugnant to their public policy ' even if the agreement would be enforceable in a different jurisdiction.

10. Don't Delay

Timing is (almost) everything in seeking injunctive relief. Unjustified delay evinces a lack of interest, suggesting a lack of irreparable harm ' which is essential to the enforcement of a non-compete. In addition, delay may exacerbate the harm caused to the former employee and new employer, which will also reduce the chances of obtaining injunctive relief. As a related consideration, the party defending against a non-compete agreement, should likewise be cognizant of timing and consider whether to file a preemptive lawsuit. While it is typically best as a putative defendant to let time pass, there are circumstances when it may make sense to bring an action first. For example, a quick, binding decision may avoid a significant expenditure of resources on a new employee who may wind up being prohibited from working for the company.

11. Remember the Practicalities

Although non-compete agreements are generally necessary to enforce or defend against for a variety of different reasons, often times, the value achieved is not worth the cost of litigation. In many instances, however, non-compete disputes can be resolved far short of litigation. A well-crafted and timed cease and desist letter can get the attention of the other side almost as well as a much more expensive lawsuit. Quite frequently, parties are able to resolve their disputes once the issues are framed for each side. An early notice can provide that opportunity.

Conclusion

Although these eleven tips are critical, they must be combined with a thorough understanding of the nuances of the law of restrictive covenants. In that vein, while non-compete agreements have been around for literally hundreds of years, the circumstances under which they will (and will not) be enforced are still evolving. Accordingly, the best protection starts with proper planning, includes regular maintenance, and requires informed decisions.

Russell Beck is a litigation partner and certified mediator in the Boston office of Foley & Lardner LLP. He can be reached at [email protected] or 617- 342-4031.

Although most lawyers provide lists of the top ten things to know about non-compete agreements, our list goes to eleven. By way of background, today's competitive marketplace is like none other in history. No matter what your industry, key corporate assets and technologies ' including trade secrets, confidential information, and customer goodwill ' are more portable, and therefore at greater risk of loss, than ever before. Exacerbating this circumstance, barriers to entry for new competition are lower than ever and employees are more mobile than ever. With these issues in mind, in-house counsel must understand how to protect the company's intellectual capital and relationships.

Although non-compete agreements are only one tool, they are also the most effective. Simply having a non-compete agreement is not, however, enough. Whether enforcing or defending against such agreements, in-house counsel must understand the fundamentals. The eleven that follow are the most critical.

1. Read the Agreement

It sounds rudimentary ' and it is ' but careful review of the applicable agreements is often overlooked. In Massachusetts as in most other states, non-compete agreements will be enforced if they are reasonably limited in duration and geographic reach, supported by consideration, and narrowly tailored to protect only the company's legitimate business interests. Although different states vary in terms of how they will treat overly broad or vague language, they pretty much all agree that the language of the agreement will be construed against the employer. Accordingly, proper planning and drafting of a non-compete agreement is critical to its eventual enforcement, and thus a careful review of the agreement at the time a conflict arises is critical.

2. Know What You Are Protecting

Notwithstanding their name, non-competes do not protect against simple competition. Nor do they prevent someone from using their ordinary skills and knowledge ' even if gained while on the job. Rather, non-compete agreements protect only “legitimate business interests.” Those interests vary by state, but generally include the protection of goodwill, trade secrets, confidential information, and special training. A thorough understanding of the particular company assets at issue is essential.

3. Interview the Employee

Whether an employee has given notice that she is leaving or a new employee is being hired from a competitor, it is critical to understand the implications. Exit and pre-employment interviews provide much of that opportunity. The information garnered from such interviews will inform many of the decisions down the road. Even where a departing employee refuses to reveal her post-employment plans ' or lies about them ' the interview is still worthwhile as, among other things, it will remind the employee of her obligations and give ammunition to lawyers charged with enforcing the agreement.

4. Don't be Myopic

To focus exclusively on the non-compete agreement is to miss the forest for the trees. The non-compete agreement is but the starting point. The employee's role at the former employer in comparison with the role at the new employer is the ultimate crux of the analysis. Only when an employee will be placed in a position to threaten the former employer's legitimate business interests will an otherwise-enforceable non-compete be enforced.

5. Don't Forget About Other Options

Even in the absence of an enforceable non-compete agreement, there may be options. For example, if the case involves the theft of trade secrets, most states ' including even California ' have laws that protect the employer from loss of its intellectual capital.

6. Find the Guilt

Enforcement of a non-compete agreement is an equitable matter that lies within a court's discretion. As the old maxim goes, “He who seeks equity, must do equity.” If a court believes that one party has acted unfairly or otherwise wrongfully, the court is more likely to try to help the other side when deciding whether or not to exercise its equitable powers. Accordingly, it is important to investigate the behavior of all of the potential parties to a dispute: the employee, new employer, and the former employer. Finding, that the employee e-mailed confidential information to his home e-mail address on the last day of employment is a fact that will auger well for the enforcement. That said, a critical mistake often made in this regard by companies seeking to enforce their agreements is failing to take stock of their own failings. For example, overlooking the fact that the former employer deceptively obtained the non-compete agreement will be fatal to any chance of its enforcement.

7. Know Thine Enemy

No proper strategic decision regarding whether or how to enforce or defend against a non-compete agreement can be made in a vacuum. You must learn what you can about the opposing party or parties, including how much of a fight they are likely to put up. A failure to perform this simple due diligence leaves you incapable of making the best decision possible under the circumstances.

8. Consider the Possible Ramifications

Before taking any action, consider your exposure. It is not uncommon for a lawsuit to be initiated by companies seeking to enforce their rights, only to be met with a counterclaim that has greater merit than the initial lawsuit. For example, an ill-conceived complaint could very well be met with a valid claim for tortious interference with business relations and unfair competition (which can result in an award of multiple damages and attorneys' fees).

9. Beware of Conflicts

There are two types of conflicts that arise in the context of non-compete agreements that are frequently ignored until it's too late. First, although the interests of the employee and new employer are generally aligned, they are not necessarily coextensive. Whenever possible, it is best to have separate counsel for the employee and the company ' particularly, as the party on the other side will do its best to exploit any potential conflicts if the two are jointly represented. Counsel for the employee and new employer can and should, however, work closely together, and typically one takes the lead, with the other simply ensuring that the other client is properly protected. The second type is the conflict of laws. When the agreement is to be enforced across state or international borders, the laws of that jurisdiction must be considered as well, as courts will not enforce agreements that are repugnant to their public policy ' even if the agreement would be enforceable in a different jurisdiction.

10. Don't Delay

Timing is (almost) everything in seeking injunctive relief. Unjustified delay evinces a lack of interest, suggesting a lack of irreparable harm ' which is essential to the enforcement of a non-compete. In addition, delay may exacerbate the harm caused to the former employee and new employer, which will also reduce the chances of obtaining injunctive relief. As a related consideration, the party defending against a non-compete agreement, should likewise be cognizant of timing and consider whether to file a preemptive lawsuit. While it is typically best as a putative defendant to let time pass, there are circumstances when it may make sense to bring an action first. For example, a quick, binding decision may avoid a significant expenditure of resources on a new employee who may wind up being prohibited from working for the company.

11. Remember the Practicalities

Although non-compete agreements are generally necessary to enforce or defend against for a variety of different reasons, often times, the value achieved is not worth the cost of litigation. In many instances, however, non-compete disputes can be resolved far short of litigation. A well-crafted and timed cease and desist letter can get the attention of the other side almost as well as a much more expensive lawsuit. Quite frequently, parties are able to resolve their disputes once the issues are framed for each side. An early notice can provide that opportunity.

Conclusion

Although these eleven tips are critical, they must be combined with a thorough understanding of the nuances of the law of restrictive covenants. In that vein, while non-compete agreements have been around for literally hundreds of years, the circumstances under which they will (and will not) be enforced are still evolving. Accordingly, the best protection starts with proper planning, includes regular maintenance, and requires informed decisions.

Russell Beck is a litigation partner and certified mediator in the Boston office of Foley & Lardner LLP. He can be reached at [email protected] or 617- 342-4031.