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Non-Competes: Theory vs. Practice

Non-competes….What aren’t you thinking about?

Much has been written about the legal enforceability of non-compete clauses in employment contracts. The use of non-competes (as well as non-solicitation, no raid and non-disparagement clauses) to protect businesses has risen in response to the highly competitive nature of industries where client relationships, trade secrets and business processes have significant value and information is highly portable. A confidentiality agreement is not sufficient when it comes to protecting the use of confidential and proprietary information. A non-compete is helpful to restrict what an exiting employee can do in the near future. However, relying on a non-compete clause to protect your business may leave you more exposed than you think. Here are some of the common drawbacks and pitfalls to consider.

Enforceability problem

To be enforceable, the non-compete clause and surrounding facts and circumstances must satisfy the applicable state law, which varies state by state. Most states apply a reasonableness test (scope, duration, etc.). The test reflects a balance between an employer’s interest to protect its business with an employee’s ability to earn a living. While some states are more willing to enforce non-compete clauses than others, many jurisdictions will look for a way to make sure enforcement is “fair” to the former employee. For example, some jurisdictions will rewrite the clause to be less onerous before enforcing. Others courts, may look for employer conduct, such as inconsistent enforcement, to justify leniency. This could become more of a factor given the current unemployment climate. The bottom-line is that even the most carefully drafted non-compete may not be a “slam dunk” when it comes to enforceability. Reliance on a non-compete should not be the sole arrow in an employer’s competitive edge protection quiver.

Dilution

Many employers include a non-compete clause in the employment agreement as a matter of course with no intention of enforcing it. Often, employers are reluctant to sue an exiting employee even if the chance a court would enforce it is high. A lawsuit can be costly, impact remaining employee morale negatively (particularly in a layoff situation), consume management and staff time and draw messy counterclaims. Instead, there is a belief that merely including the clause will induce voluntary compliance. While this may be true in some cases, failure to enforce the clause consistently may have deleterious consequence when you want to enforce it against a particular departing employee. Moreover, failure to enforce will dilute the voluntary compliance effect with your current employees. To avoid this pitfall, be more discerning when deciding to include a non-compete clause in a particular contract. Include it in contracts where you are prepared to enforce it. Adopt a business practice to advise the employee upon departure of the restriction (as well as obligations under a confidentiality agreement) and track where an exiting employee lands. The era of social marketing makes this easier. At regular intervals, conduct an Internet search to determine whether the former employee has set up a competing business or gone to work for a competitor. Similarly, if you receive a reference inquiry from a competitor, advise the potential employer about the restriction in a manner consistent with your attorney’s advice. Consider strategies to protect selective enforceability. For example, in some jurisdictions, entering into a contract where an employee gives up a right or benefit in exchange for formally waiving the non-compete clause may help you defend selective enforcement. This will vary based on state law.

Don’t leave the barn door open

Non-compete and confidentiality agreements serve as a deterrent and are tools to pursue violations, but they are not enough to truly protect your business. Assume your employees will go to a competitor and consider ways to protect your competitive edge.

For example:

• Expand your routine technology audit beyond focusing on breaches to the system from the outside. How can you protect information from leaking out or being taken from inside your system?
• Develop a client relationship coverage model which secures the relationships beyond one individual
• Confirm your archiving system preserves all critical data
• Develop a response protocol when you learn an exiting employee is engaging (or considering) in conduct contrary to a non-compete or confidentiality agreement
• Develop a strong alumni network – encourage employees to maintain a positive relationship with your company

The best offense is a strong defense. Bolster your legal protections with business processes that mitigate the harmful effects of an exiting employee competing with your business.

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use.

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