Non-Competition Agreements: Ten Cautionary Thoughts

People do odd things when they enter into a new relationship. I call it the honeymoon period. It’s a time when it is all good, your vision is clouded by optimism that overlooks faults or problems that are visible to everyone else. Words of caution from well meaning friends have the sound of crazy alarmist rhetoric. No, this post is not about relationship advice, it’s about the workplace.

The same phenomenon occurs when a new employment relationships is started. Employees are so happy to get the job with perceived infinite opportunities for advancement that they never pay attention to obvious signs that the relationship is not going to work. Obvious things like how is the company doing financially, how does it stand in relation to competitors, the turnover rate , and how do present and former employees feel about the company. Employers are guilty of the same thing. They become so determined to fill a need that they do not spend the time checking background and references. They ignore obvious signs of a potential problem because the candidate says the right things in the interview. Every employer and employee has the battle scars from these mistakes. Employees have told me of employers who brag about a fun and joking environment that really meant they would have to endure abusive superiors who took pleasure in berating them. Employers have told me stories of the person who left them with an uneasy feeling but their resume and interview answers were exceptional so they ignored those subtle warnings that are indicative of an employee that will be a problem.

During this time, employers and employees make promises that they feel they never have to keep because they don’t envision this new relationship ever ending. One of those promises is the promise to be bound to a non-compete. Most employers think a non-compete is an essential ingredient to protect their company, even though their real concern is confidentiality or non-solicitation. Employees view non-competes as “standard contracts” than everyone has to sign. If you take anything from this post, I want you to remember two things:

1. There is no such thing as a standard agreement; and

2. Everything is negotiable…everything.

With the recent economic downturn, employers are more likely to enforce a non-compete and less likely to look the other way, especially if you are considered to be top talent. IBM, Dell, HP, and Apple have recently been involved in very public disputes over the enforcement of non-competes. To the employee this can mean not getting that great job new job. It can mean having to pursue a new career path or having to move in order to get work.

The truth is that employers and employees to think before they leap into a non-competition agreement. As a result, here are my 10 tips to consider before proposing or inking that non-compete.

1. Ask yourself what you are trying to accomplish.

Is the goal of the agreement to protect your confidential/proprietary information? If so, a non-compete may not be necessary. Instead, you should consider using a confidentiality agreement. Too often employers have not defined what they are trying to accomplish. The end result is they use a shotgun when a scalpel is sufficient.

2. Is the restriction reasonable?

States that enforce non-competition agreements are going to require the agreement to be reasonable in duration and geographic scope. What that means is that you are not going to a persuade a court to enforce a non-compete that lasts for eternity and prohibits an employee from working anywhere in the Milky Way galaxy. They will enforce an agreement that prohibits competition for 1,2 or 3 years in the geographic location where a company actually does business. Remember: Less is more. Prudent employers recognize that non-competition agreements that are narrowly tailored will less likely to be challenged in court. Translation. Less legal fees and a greater likelihood your objective will be achieved.

3. Employees: How you are going to get paid while the non-compete is in effect?

A common complaint from employees is that the non-compete prohibits them from earning a living once they leave their employer. An employee signing a non-compete should consider asking their employer to pay them for the time that they are bound by the non-compete. Although some may think this is a radical idea, it offers distinct advantages to the employer and employee. For the employer, the prospect of having to pay a departed employee its wages has the effect of causing the employer to give serious thought to the duration and geographic scope of the agreement. In addition, by paying an employee during the period of non-competition, the employer has the contractual and moral high ground in the event it has to enforce the agreement. For the employee, it provides an income during the period of non-competition and thereby provides an incentive not to violate the agreement.

4. What happens if your company is sold or you are laid off.

Many employees signing non-competition agreement find themselves bound by that agreement after they are laid off or their employer merges with or is acquired by another company. The time to address these issues is at the beginning of the employment relationship while the prospect of a lay off, merger or acquisition is not on the horizon.

5. Where are you going to dance and what type of music will you be dancing to?

Lawyers refer to this as venue and choice of law. Venue means the court that will hear any dispute over the non-compete. Savvy employers will insist that cases are heard in jurisdictions that are inclined to enforce non-competes. Choice of law is the law that will apply. Again, employers will insist on jurisdictions that favor enforcement of the agreement. Employees should exercise great care when it comes to venue and choice of law clauses. One of the worst things for an employee to encounter is having to defend against enforcement of or challenge a non-compete in another part of the country. This gives the party with the most money a distinct advantage.

6. Tell prospective employers about your non-compete.

Many employees try to act like a non-compete does not exist. When the former employer alerts the new employer that the employee is bound by a non-compete, the employee acts surprised when they find themselves out of a job. It is always in the employee’s best interests to allow a prospective employer to view their non-compete. In that way, the new employer can have the agreement vetted by their legal counsel. In many instances, if legal counsel opines that an employee is not barred from working at a company because of a non-compete, the employer will agree to provide their employee with legal defense in the event the past employer seeks to enforce the agreement.

7. Tell your employer that you have accepted the new position.

Transparency goes a long way. Many employees create problems by not being candid with their employer. Instead, they accept a position with a potential competitor. Once the former employer learns that the employee has accepted the new position, it immediately assumes the worst. Not only does this usually result in litigation, it also jeopardizes any possibility that the employee will be able to return to the company in the future.

8. Make sure you pay consideration to support the non-compete.

Many states require a non-compete to be supported by consideration. Talk to your lawyer to determine what is adequate consideration for a non-compete.

9. Figure out what it is that you need?

This goes back to item 1 which was what are you trying to accomplish. If you want to prohibit a departing employee from raiding your workforce or your customers then have them sign a non-solicitation agreement. If you are trying to protect confidential information such as customer names or other data your company treats as proprietary have the employee sign a confidentiality agreement.

10. Don’t forget about the UTSA and the employee’s duty of loyalty.

Once you, as the employer, define what it is that you are trying to protect, you will find that legal remedies exist that are designed to protect you. Many states, including Washington, recognize that a departing employee has a duty of loyalty to their employer until they leave. In addition, most jurisdictions recognize the Uniform Trade Secrets Act (UTSA) which has a strong enforcement mechanism. Sometimes these existing legal mechanisms, are adequate to address your concerns.

Rod Stephens: Rod Stephens, of The Stephens Law Firm, brings a unique perspective to the table in that he counsels and represents employers and employees. This provides him with a keen insight into the manner in which employers and employees perceive work-related issues.
Rod is AV rated by Martindale Hubbell, has been recognized in the 2006 Martindale-Hubbell Bar Registry of Preeminent Lawyers, and has been selected as one of Washington Law & Politics magazine’s Super Lawyers from 2000 to 2007. Rod is a frequent speaker at seminars for legal and human resources professionals. To learn more about The Stephens Law Firm go to www.stephenslawfirm.com or Rod’s blog www.employmentadvisoryblog.com

This article originally appeared at Employment Advisory Blog on June 06.2009 and is reprinted here with permission from the author.