The Big Three Myths (And Realities) of Non-Compete Agreements

With regard to what constitutes sufficient consideration, in nearly all of the states in which non-compete agreements are permissible, the offer of employment will constitute adequate consideration for enforcement of the non-compete agreement. That said, several jurisdictions, such as Minnesota, require that the non-competition agreement be provided to the individual prior to the commencement of employment so that the person will have a sufficient opportunity to review and understand the terms and conditions of the employment and post-employment restrictions placed on him or her. It is often recommended that the non-competition agreement be provided to the individual in conjunction with the offer letter and specific reference is made to the agreement as a term and condition of the person's hiring.

Additionally, non-compete agreements executed after the person commences employment may be supported by sufficient consideration and, thus, enforceable in certain jurisdictions. In fact, the majority of the states, including Arizona and Michigan, indicate that the continuation of employment is sufficient consideration to support post-employment restrictions. However, other states, such as Texas and North Carolina, have expressly stated that the mere continuation of employment is insufficient consideration. Instead, those jurisdictions require additional consideration to support any non-competition agreement following commencement of employment. This additional consideration must be more than nominal, but real and substantial. For instance, a job promotion, an increased salary and/or job responsibilities, or an incentive bonus for entering into the non-competition agreement while an employee, likely would be deemed sufficient consideration.

In addition to failing to provide sufficient consideration, many employers fail to narrow the scope of the post-employment restrictions to be imposed on the departing employee and, as a result, the non-competition agreement will not be enforced. The majority of jurisdictions require that the limitations placed on the employee be narrowed to the legitimate business interests the employer seeks to protect both geographically and temporally. For instance, under Wisconsin law, a covenant not to compete “within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal.” Those jurisdictions permitting non-competition agreements similarly follow Wisconsin's statute.

Typically, in states in which non-competition restrictions are permissible, the geographical scope should be limited to the area in which the employee worked and/or conducted business on behalf of the company. For sales employees, employers should consider narrowing the geographical territory in which the individual conducted sales calls, generated business, or submitted proposals. Additionally, many courts will enforce a non-competition agreement that restrains the departing employee from doing business in a specified industry or with designated customers and vendors with whom that individual had contact prior to his or her departure. This could be as broad as the entire United States or other countries so long as it is reasonably necessary to protect the legitimate business interests of the company from which the employee is departing.

Similarly, in those jurisdictions in which non-compete agreements are permissible, the length of time restricting the employee from competing must be narrow and reasonable for the protection of the former company. In limited circumstances, the restriction should be no more than two years post employment. South Dakota, for instance, statutorily limits any non-competition agreement to no more than two years. Again, the focus of the time for restraint is upon the protection of the legitimate business interests.

Finally, non-competition agreements often are not enforced, as the employer has failed to ensure that the restrictions imposed truly are for the protection of the legitimate business interests. Requiring all employees to enter into non-competition agreements cuts against the employer's argument that enforcement of those agreements is necessary to protect the company. In fact,
employers often unknowingly create waiver arguments for the
departing employee against whom enforcement is sought. The reality is that the employer will not seek compliance of the agreement by all departing employees ' just those who are essential to the company or could do the most harm to the organization by working for a competitor. As such, the employer creates a waiver argument for the departing employee, stating that the company's use of non-competition agreements really is not to protect a legitimate business interest since it allowed others to work at organizations competitive with the former company. Thus, an employer should carefully consider which job positions create the greatest vulnerabilities to the company should an employee leave and join a competitor, and require that narrow group of employees to enter into non-competition agreements.

Myth Two: Even if the Non-Compete Agreement Is Valid, It Will Cost Too Much

Reality: While it is true that successful enforcement of a non-competition agreement typically involves the expenditure of legal fees and costs, a well-drafted agreement must include a recovery provision in order to reduce and/or eliminate the costs associated with enforcement. This recovery provision should include specific language regarding the recovery of attorneys' fees and costs, including computer forensic costs, following successful enforcement of the non-competition agreement. Further, the recovery provision should include an extension of the non-competition period to encompass all of the time in which the departing breached his or her obligations, including the time spent by the employer for enforcement of those obligations. Litigation of non-compete agreements can be both costly and timely. Inclusion of these key recovery provisions will shift the burden of both on to the departing employee, making an employee more cautious prior to acting in a manner contrary to the non-compete agreement.

In addition to seeking enforcement of the non-competition agreement against the departing employee, the company should consider possible claims against the new employer. Many states recognize the common law claim of tortious interference with a business relationship and/or contract. By placing the new employer on notice of the departing employee's contractual obligations and demanding compliance with those obligations, the former employer could successfully argue that the new employer should be responsible for the damages suffered as a result of its employment of the departing employee. Most departing employees would not have the financial wherewithal to pay for the attorney's fees, costs and damages following a breach of the non-competition agreement. Thus, seeking recovery from the new employer is an effective mechanism for the company to eliminate or greatly reduce its costs and legal fees in connection with enforcement of its contracts.

Myth Three: Non-Compete Agreements Prohibit
Employees from Soliciting Business or Disclosing
Confidential Information

Reality: Generally, a non-competition agreement restrains a departing employee from working with or for a competitor of the former company. It usually does not prohibit the departing employee from soliciting the business of, or recruiting employees at, the former employer. It also does not necessarily bar the departing employee from disclosing confidential business information or trade secrets. As such, employers who are concerned about protecting its business relationships, employee relationships and business information are wise to include non-solicitation and non-disclosure provisions in their agreements.

In most jurisdictions, a non-solicitation agreement will be enforced in a very similar manner to which a non-competition agreement is enforced. The non-solicitation provision also must be supported by adequate consideration and must be reasonable in geographical and temporal scope. It should be narrow and limited to protect the legitimate business interests of the company. For example, an employer may want to require departing members in Human Resources to enter into a non-solicitation of employees as many of those individuals were involved in the recruitment and retention of those individuals.

Additionally, companies that truly seek to protect their confidential business information and trade secrets should have all employees sign a non-disclosure agreement. Again, the agreement must be supported by adequate consideration. This not only includes employment with the company, but also access to the employer's confidential business information and/or trade secrets. This confidential business information can include sales forecasts, pricing information, marketing plans,
strategic recruitment objectives, or succession planning.

Conclusion

Essential to successful enforcement of the non-disclosure agreement is the manner in which the employer protected its confidential information. Employers should carefully consider how readily available this business information is, including creating password protections for certain information, limiting accessibility via employees' home computer or smart phones, or restricting printing of such material. Further, employers should examine the frequency with which they train employees on protecting the confidential business information, and require regular acknowledgements regarding such training. By implementing these measures, an employer will bolster its position for successful enforcement of the non-disclosure agreement against the departing employee and, ultimately, protect its business interests.

Tina A. Syring-Petrocchi is a partner in Barnes & Thornburg LLP's Minneapolis office and a member of the firm's Labor and Employment Law Department. She can be reached at [email protected] article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.

The following are some common myths you need to know.

Myth One: All Non-Compete Agreements Are Unenforceable

Reality: While there are certain states in which non-competition agreements for employees generally are unenforceable as a matter of law (i.e., California and North Dakota), the reality is that many jurisdictions will enforce a properly drafted and executed non-competition agreement. The issues most employers face when seeking to enforce a non-compete agreement are twofold: 1) the document was not supported by sufficient consideration; and/or 2) the agreement was poorly drafted, resulting in provisions directly contrary to the general legal principals in the enforcing jurisdiction.

With regard to what constitutes sufficient consideration, in nearly all of the states in which non-compete agreements are permissible, the offer of employment will constitute adequate consideration for enforcement of the non-compete agreement. That said, several jurisdictions, such as Minnesota, require that the non-competition agreement be provided to the individual prior to the commencement of employment so that the person will have a sufficient opportunity to review and understand the terms and conditions of the employment and post-employment restrictions placed on him or her. It is often recommended that the non-competition agreement be provided to the individual in conjunction with the offer letter and specific reference is made to the agreement as a term and condition of the person's hiring.

Additionally, non-compete agreements executed after the person commences employment may be supported by sufficient consideration and, thus, enforceable in certain jurisdictions. In fact, the majority of the states, including Arizona and Michigan, indicate that the continuation of employment is sufficient consideration to support post-employment restrictions. However, other states, such as Texas and North Carolina, have expressly stated that the mere continuation of employment is insufficient consideration. Instead, those jurisdictions require additional consideration to support any non-competition agreement following commencement of employment. This additional consideration must be more than nominal, but real and substantial. For instance, a job promotion, an increased salary and/or job responsibilities, or an incentive bonus for entering into the non-competition agreement while an employee, likely would be deemed sufficient consideration.

In addition to failing to provide sufficient consideration, many employers fail to narrow the scope of the post-employment restrictions to be imposed on the departing employee and, as a result, the non-competition agreement will not be enforced. The majority of jurisdictions require that the limitations placed on the employee be narrowed to the legitimate business interests the employer seeks to protect both geographically and temporally. For instance, under Wisconsin law, a covenant not to compete “within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal.” Those jurisdictions permitting non-competition agreements similarly follow Wisconsin's statute.

Typically, in states in which non-competition restrictions are permissible, the geographical scope should be limited to the area in which the employee worked and/or conducted business on behalf of the company. For sales employees, employers should consider narrowing the geographical territory in which the individual conducted sales calls, generated business, or submitted proposals. Additionally, many courts will enforce a non-competition agreement that restrains the departing employee from doing business in a specified industry or with designated customers and vendors with whom that individual had contact prior to his or her departure. This could be as broad as the entire United States or other countries so long as it is reasonably necessary to protect the legitimate business interests of the company from which the employee is departing.

Similarly, in those jurisdictions in which non-compete agreements are permissible, the length of time restricting the employee from competing must be narrow and reasonable for the protection of the former company. In limited circumstances, the restriction should be no more than two years post employment. South Dakota, for instance, statutorily limits any non-competition agreement to no more than two years. Again, the focus of the time for restraint is upon the protection of the legitimate business interests.

Finally, non-competition agreements often are not enforced, as the employer has failed to ensure that the restrictions imposed truly are for the protection of the legitimate business interests. Requiring all employees to enter into non-competition agreements cuts against the employer's argument that enforcement of those agreements is necessary to protect the company. In fact,
employers often unknowingly create waiver arguments for the
departing employee against whom enforcement is sought. The reality is that the employer will not seek compliance of the agreement by all departing employees ' just those who are essential to the company or could do the most harm to the organization by working for a competitor. As such, the employer creates a waiver argument for the departing employee, stating that the company's use of non-competition agreements really is not to protect a legitimate business interest since it allowed others to work at organizations competitive with the former company. Thus, an employer should carefully consider which job positions create the greatest vulnerabilities to the company should an employee leave and join a competitor, and require that narrow group of employees to enter into non-competition agreements.

Myth Two: Even if the Non-Compete Agreement Is Valid, It Will Cost Too Much

Reality: While it is true that successful enforcement of a non-competition agreement typically involves the expenditure of legal fees and costs, a well-drafted agreement must include a recovery provision in order to reduce and/or eliminate the costs associated with enforcement. This recovery provision should include specific language regarding the recovery of attorneys' fees and costs, including computer forensic costs, following successful enforcement of the non-competition agreement. Further, the recovery provision should include an extension of the non-competition period to encompass all of the time in which the departing breached his or her obligations, including the time spent by the employer for enforcement of those obligations. Litigation of non-compete agreements can be both costly and timely. Inclusion of these key recovery provisions will shift the burden of both on to the departing employee, making an employee more cautious prior to acting in a manner contrary to the non-compete agreement.

In addition to seeking enforcement of the non-competition agreement against the departing employee, the company should consider possible claims against the new employer. Many states recognize the common law claim of tortious interference with a business relationship and/or contract. By placing the new employer on notice of the departing employee's contractual obligations and demanding compliance with those obligations, the former employer could successfully argue that the new employer should be responsible for the damages suffered as a result of its employment of the departing employee. Most departing employees would not have the financial wherewithal to pay for the attorney's fees, costs and damages following a breach of the non-competition agreement. Thus, seeking recovery from the new employer is an effective mechanism for the company to eliminate or greatly reduce its costs and legal fees in connection with enforcement of its contracts.

Myth Three: Non-Compete Agreements Prohibit
Employees from Soliciting Business or Disclosing
Confidential Information

Reality: Generally, a non-competition agreement restrains a departing employee from working with or for a competitor of the former company. It usually does not prohibit the departing employee from soliciting the business of, or recruiting employees at, the former employer. It also does not necessarily bar the departing employee from disclosing confidential business information or trade secrets. As such, employers who are concerned about protecting its business relationships, employee relationships and business information are wise to include non-solicitation and non-disclosure provisions in their agreements.

In most jurisdictions, a non-solicitation agreement will be enforced in a very similar manner to which a non-competition agreement is enforced. The non-solicitation provision also must be supported by adequate consideration and must be reasonable in geographical and temporal scope. It should be narrow and limited to protect the legitimate business interests of the company. For example, an employer may want to require departing members in Human Resources to enter into a non-solicitation of employees as many of those individuals were involved in the recruitment and retention of those individuals.

Additionally, companies that truly seek to protect their confidential business information and trade secrets should have all employees sign a non-disclosure agreement. Again, the agreement must be supported by adequate consideration. This not only includes employment with the company, but also access to the employer's confidential business information and/or trade secrets. This confidential business information can include sales forecasts, pricing information, marketing plans,
strategic recruitment objectives, or succession planning.

Conclusion

Essential to successful enforcement of the non-disclosure agreement is the manner in which the employer protected its confidential information. Employers should carefully consider how readily available this business information is, including creating password protections for certain information, limiting accessibility via employees' home computer or smart phones, or restricting printing of such material. Further, employers should examine the frequency with which they train employees on protecting the confidential business information, and require regular acknowledgements regarding such training. By implementing these measures, an employer will bolster its position for successful enforcement of the non-disclosure agreement against the departing employee and, ultimately, protect its business interests.

Tina A. Syring-Petrocchi is a partner in Barnes & Thornburg LLP's Minneapolis office and a member of the firm's Labor and Employment Law Department. She can be reached at [email protected] article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.