Every organization wants to protect its assets, and employees are undoubtedly vital to any employer as one of its greatest resources. Thus, an employer will often use a noncompete agreement, which is a type of restrictive covenant designed to limit an employee’s ability to work in similar employment for a competitor.
Employers often have a difficult time navigating the ins and outs of noncompete agreements because there is no uniform federal law governing their enforceability. These types of agreements are actually considered contracts, and state law governs contracts. To make things even more challenging, this area of the law constantly seems to be evolving. So what is a multistate employer to do?
In a recent XpertHR webinar, Proskauer Rose LLP employment attorneys John Barry and Guy Brenner discussed the enforceability issues of noncompete agreements on a nationwide basis.
Brenner addressed the uniqueness of enforceability issues surrounding noncompete agreements by noting, “Typically, when you are dealing with the enforcement of these contracts, courts are conflicted. On the one hand, you may have a perfectly enforceable contract. But on the other hand, what you’re asking a court to do is tell someone they have to stop working.”
Although state law generally governs restrictive covenants and varies in many different respects, there are a few consistencies. In general, to be enforceable, a noncompete agreement must:
- Be allowed in the state;
- Not involve a prohibited industry;
- Satisfy any applicable notice requirements;
- Be supported by consideration;
- Protect a legitimate business interest; and
- Be reasonable in scope, duration and geography.
Various states restrict noncompete agreements in different ways. A few states completely ban noncompete agreements (e.g., California, North Dakota and Oklahoma), while other states prohibit or limit them in certain industries. For example, some states limit or restrict noncompetes for:
- Medical professionals;
- Security guards;
- Lawyers; and
- Certain technology-industry employees.
Notice and Consideration
Barry and Brenner also discussed how some states restrict how and when an organization can roll out a noncompete agreement to an employee or prospective employee. However, they stressed that regardless of state timing requirements, it’s important for an employer to document when it actually gives the noncompete agreement to the employee.
Additionally, since restrictive covenants are contracts, they require consideration. Barry and Brenner succinctly summarized the legal concept of consideration by explaining that, “Essentially, each side is getting something.” Of course, they were careful to explain that regardless of certain theories taught in law school, handing over a crisp one dollar bill would not be adequate since consideration must truly be something of value.
So what is considered sufficient consideration? Barry and Brenner made clear that money and grants of stock are usually always going to work for consideration. However, other examples such as an employment offer, specialized training and continued employment may be hazier and can really depend on a state’s law and how that law has been interpreted by the courts.
Protection of Legitimate Interests
When an employer is drafting a noncompete agreement, it must make sure that it is protecting a legitimate business interest. According to Barry and Brenner, courts generally recognize five items as constituting legitimate business interests:
- Confidential information;
- Trade secrets;
- Specialized training; and
- Workforce stability.
Unfortunately, many disputes over noncompete agreements end up in court. This means when employers draft noncompetes, they must consider what a court might take into account. Since a court is almost always going to consider whether a restrictive covenant is reasonable in scope, an employer will want to make sure its agreements are not overbroad in terms of duration or geography.
If a court finds that a noncompete agreement is overbroad, what can it do? Well, it depends on the state. Some states allow a court to amend the noncompete, while others would simply require that the whole agreement be thrown out. Other states may fall somewhere in the middle.
Courts may also consider various other factors when determining the enforceability of a noncompete. For example, they may look at:
- Whether the employee left in a professional manner;
- The recruiting process used by the new employer;
- Whether a trade secret is at risk; and
- The rival employer’s motivation for hiring the employee.
New Employer Strategies and Considerations
Barry and Brenner wrapped up their presentation by reviewing some best practices an employer should use during the hiring process to prevent any future problems with noncompete agreements. They discussed documents that should be used in every hire, the best way to communicate during the hiring process and what information should be gathered from a potential hire regarding post-employment restrictions he or she might be bringing along.
For more insights you can’t afford to miss about noncompete agreements, listen to our on-demand webinar featuring John Barry and Guy Brenner.