Get to Know Non-Compete Agreements
Non-compete agreements, sometimes called sealed covenants, are contracts between an employer and employee that restricts the employee from competing with the employer for a specified period of time after leaving employment for the purposes of protecting confidential information. It limits the geographical area within which the employee may compete and some non-competes also prohibit an employee from working with certain clients or customers of the employer. Non-competes are used by employers to protect valuable company information, such as the names of customers and contact information, technical data, marketing plans, and product formulas.
A non-compete agreement may result in being prohibited from joining a competitor or working with customers or clients of the former employer, prohibited from starting a competing business , or restricted from soliciting former customers or employees of a former employer. Additionally, since many non-compete agreements also encompass non-solicitation or confidentiality clauses, an employee may be restricted for a period of time after leaving the employer from soliciting company employees to leave employment and share confidential information with a competing company.
In order for a non-compete to be enforced, courts generally require that the non-compete be reasonable in time and geographic restrictions. In Georgia, the maximum time period for a post-employment non-compete is 2 years. Non-competes are generally limited both in terms of the geographic territory it encompasses and the activities that the former employee is restricted from undertaking. If the restrictions are not reasonable, the judge may render the entire covenant unenforceable.
Evaluating Enforceability
Not all non-compete provisions are created equal. Nor are they equally enforceable. Generally speaking, states and courts have enforced non-compete agreements or portions of those agreements to the extent that such restrictions are reasonable under the circumstances. Two key factors in determining whether a non-compete is reasonable and, therefore, enforceable are (1) the specific jurisdiction from which the initial inquiry arises, and (2) the particular circumstances of the employment situation involved. As a result, even though non-compete agreements might appear to be similar on their face, their enforceability can vary widely depending on the jurisdiction from which any inquiry arises.
Although many states generally tend to be outside of the norm in terms of non-compete restrictions, Ohio is, for example, generally considered to be "fairly protective of the employer when it comes to the enforcement of restrictive covenants." In other words, in Ohio, non-compete agreements and their underlying employment contracts are generally enforceable if the restrictions imposed are found to be reasonable in terms of time and geographic scope. Yet, there is no one-size-fits-all rule of enforceability. For example, Missouri courts have gone so far as to say that a non-compete agreement "will not be enforced if it is greater than is reasonably necessary to protect the employer." What does that mean? It means that, in Missouri, a non-compete agreement is more likely to be enforceable if its terms reflect specific facts, regardless of its duration and geographic scope. That means that an employee may be able to convince a Missouri court to strike portions of a non-compete agreement if the terms of that agreement are burdensome, but do not sufficiently protect the legitimate interests of the employer. If the Missouri courts are willing to do that, it follows that in Ohio, for example, a non-compete agreement with similarly restricting terms and fewer specific facts bolstering it might also be found to be unenforceable in part or in full.
The enforceability of non-compete provisions varies from state to state. Some states enforce them broadly, others not at all. What are some examples of varying enforceability? In Alaska, non-compete agreements are less likely to be found to be enforceable, in part due to the state’s invocation of RSA 25-5-12, which specifically provides that any restrictive covenant must be "necessary for the unrestricted use of the employee’s confidential information" or to protect the employer’s right to exclusive ownership of a client base developed through the employee’s talent and skill—let alone be reasonably limited in time and geographic scope. Alabama courts tend to uphold non-compete agreements that expressly state the parties’ agreement requires them to comply with the Alabama non-compete statute, even if the restrictions may otherwise be unreasonable in scope. California has no tolerance for non-compete restrictions and courts are quick to reject non-compete agreements altogether. Connecticut courts tend to uphold non-compete agreements only in the context of the sale of a business. In Indiana, non-compete restrictions are hard to enforce, although courts are more willing to uphold them if enforced in the context of a sale of a business.
Negotiating a Mutual Release
Unfortunately, when an employee is subject to a non-compete agreement, there could be big costs in getting released. It may take negotiations with the existing or former employer or even with the company or business that purchased the company that employed you. For instance, suppose you were an employee of Mega Corporation and then you were fired. Suppose Product & Credit Company then bought the assets of Mega Corporation and assumed the obligations of the contracts of Mega Corporation with respect to its former employees. Assuming there is a non-compete agreement, Product & Credit Company is in the best position to negotiate. You cannot ignore the non-compete agreement simply because Mega Corporation has been acquired.
So, it is wise, if not necessary, to speak with your former employer about potentially ending the non-compete agreement or shortening it or at least modifying some aspects of it. Maybe the employer doesn’t want to expose itself to a law suit by enforcing the non-compete agreement. Maybe they want to do something other than litigate. Maybe they want to facilitate your ability to get employment in the geographic area of your choice. In many cases, the employer would likely prefer to negotiate the employee’s release from the non-compete agreement rather than litigate. Also, it may be worth asking about a release of the non-competition agreement for services. It is more likely that the employer will be flexible on the scope of the non-compete agreement. The geographic scope can be important as well as the scope of the activities that you are restricted from doing.
Sometimes, it is possible to negotiate some benefits in exchange for a release from the non-compete agreement. After all, the employer is likely already exposed to making some concession in any litigation in which the non-compete agreement becomes an issue. It is also possible that the employer will agree to some pay during the period of time that the employee is bound to the non-compete agreement. Of course, an employee is not in a position to demand such payments. It is good to ask whether it can be negotiated. It is also appropriate that the payment continue in the event of an acquisition. If the customer comes to you, you might not want it to be a reason for denying you payment. The point is that an employer might just pay to avoid litigation.
Just as there may be a possibility of being paid to avoid litigation, you may have to pay to get out of a non-compete agreement. For instance, if you were the overall chief executive of a company and had a non-compete agreement with a year to run, it could be worth paying out the balance of that year to be free of the burdens of the non-compete agreement. It may be that your year of non-compete payments can be paid to make a mortgage payment on a home or three years of college for your child. If you have a year of payments remaining in your non-compete agreement, it could be well worth considering an additional payment that could help create a potential early release from the non-compete obligation.
Legal Grounds for Invalidation of a Non-Compete
While non-compete agreements are still looked upon favorably by most jurisdictions, there are several different circumstances in which an otherwise valid non-compete agreement can be set aside. For example, where an employer extracts the promise not to compete by use of fraud or duress, the non-compete agreement would be unenforceable. In other words, if the employer makes a false promise in order to induce an employee to enter into the non-compete agreement and then later acts in bad faith in refusing to meet that promise, the breach of that promise may vitiate the non-compete agreement and free the employee from any obligation. Similarly, if the promise not to compete was extorted by threats of physical injury or scare tactics, the promise may not be enforceable. Serious violation of other labor laws, however, may also have the effect of negating the restrictive covenant. For example, where the employer has violated a law requiring payment to employees, it may result in the employer being denied the ability to skip out on its promise not to compete, unless the unlawful practice is brief or mitigated. Because the particular facts and circumstances are of critical importance in such situations, and also because there are other legal grounds to argue against the enforcement of a restrictive covenant, an attorney should be consulted to see if one of these arguments might be available.
Taking Legal Action
You may be thinking at this point, "How do I navigate my way out of a non-compete?" Before you try to weasel your way out on your own, you ought to consult with a lawyer who specializes in employment law. An employment lawyer can help you in a number of ways.
First, a lawyer can help you interpret the agreement. You may not realize that a judge will throw out your non-compete if he or she thinks it goes too far. How does the judge decide if it is reasonable or not? He or she looks at the purpose for the non-compete and how hard it would be for you to find a job in your specific field if the non-compete is enforced. If your employer’s stated purpose for requiring the non-compete is to protect confidential and trade secret information, a lawyer can advise you about your employer’s ability to keep some of that information confidential . For example, if your company’s confidential business information consists of customer lists that your company made a big deal of in hiring you, a court may be more willing to throw out your non-compete than if your employer simply lists your employer’s unique knowledge of this industry, as well as its business processes and methods, as confidential information.
Second, if you don’t like what the non-compete requires of you, your lawyer can help you develop a plan to deal with the situation in a way that is best for you. Your lawyer has seen a lot of this and understands the risks. You get to be the one to determine which of those risks, if any, you are willing to take.
Pursue Another Career
Once you have a firm understanding of the parameters of your non-compete agreement, and have here determined that your new job falls well within those parameters, you then have several alternatives as to how to move forward with your ability to find a new job.
With respect to the alternative career paths you have available to you, the process will be the same. You will have to determine what career path you would like to pursue, if your non-compete agreement stands in the way, and then seek to have your non-compete agreement modified or narrowed to allow you to pursue that particular career or job opportunity. Whether you pursue the opportunities after the non-compete agreement is enforced, or before, is up to you.
However, because most non-compete agreements do not specify an industry or area in which you cannot work in, your ability to pursue opportunities in other fields is generally wide open. You likely can pursue opportunities in many different areas without worrying about violating your non-compete agreement.
Freelancing, as an example, may well be an option for you as well, even if your non-compete agreement prevents you from working for traditional competitors of your former company. Rather than providing your services to a traditional competitor, you may have the ability to provide your services directly. For example, if your non-compete agreement prevents you from working in sales for a traditional competitor, you may be able to provide sales services on your own as an independent contractor.
These options are only available in the absence of language in your non-compete agreement stating otherwise, however.
Preparing for Consequences
If you opt to breach your non-compete agreement, you need to prepare yourself for the potential consequences. You will almost certainly have legal action taken against you by your employer. You will have to pay your attorney fees and you will be defending an issue that you would otherwise not have to address. And if you are not able to join with your new employer in asking the Court to limit the prior restraint, you have potentially exacerbated your damages. There is also the risk you will have to immediately stop working for your new employer pending adjudication of the request to enjoin you from doing what your new employer wants you to do. All of this is to say your ability to breach your non-compete agreement without consequences will depend on how competent your employer’s counsel is , whether your new employer’s counsel is competent and whether the Judge you draw knows anything about covenants not to compete. I am again reminded of the case where I wrote a concurring opinion in the Court of Appeals which determined my client was right in resigning from his job and then starting a competing business. The Judge, however, refused to make him whole. He was going to get paid nothing by the opponent who had lost at trial, and he was going to have to pay Plaintiff’s appellate attorney fees because Plaintiff had not obtained the relief it sought. When told this by his attorney, who happened to be me, he said "Gary, I might as well have paid you the attorney fees up front". He was serious and even though he had lost the right to join with his new employer, he had saved a lot of grief and stood in a much better position with his new employer than if he had not fought back the request to enforce his non-compete agreement.