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Inside: Factors Affecting the Enforceability of Non-Compete Agreements
To be enforceable, non-compete agreements, like all contracts, require adequate consideration
Commonly, when an employer elects to enforce a non-compete agreement, an employee will defend not only on the ground that he does not pose a serious competitive risk, but that the employee should be relieved of his non-compete obligations due to offending conduct by the employer or to some technical failure of the agreement.
In some instances, the employer’s conduct may substantially influence the issue of enforceability. In the simplest example, an employer’s prior “material” breach of an employment agreement may relieve the employee of his obligations under a non-compete provision contained in the agreement.
However, employer conduct short of a “material” breach may influence the enforcement analysis. Courts have also held that termination by an employer without cause may, under appropriate circumstances, relieve the employee of her non-compete obligations. While there is no bright line rule in this regard, some courts have observed the apparent contradiction between an employer’s decision to terminate the employee and subsequent attempt to control the employee’s actions for fear of competitive injury. This has been observed as a potential factual contradiction (i.e. if the employee is so valuable to the employer, why did the employer choose to terminate the employee without cause?) and as an equitable contradiction (i.e. how can it be fair for the employer to terminate an employee for no legal fault of his own and then ask the court to command him not to work in his chosen field for the non-compete period?) Drafting techniques exist to minimize the risk these apparent contradictions pose, such as including language making it clear that the clause will apply regardless of the manner of termination and language providing for payment of compensation to the employee during the restraint period to reduce the financial burden on the employee. Employers should consider carefully local law and the manner in which any employee will be terminated and treated after termination if potential enforcement of a non-compete agreement is important.
Not uncommonly, employers are also attacked for not rigorously and uniformly enforcing non-compete agreements with other employees under analogous circumstances. These defenses tend to arise when the employer has not been consistent in requiring all similarly-situated employees to execute non-compete agreements or when the employer has selectively enforced (or not enforced) non-compete agreements in the past. The defense may sound as estoppel or as a factual contradiction to an employer’s assertions of valuable protectable interests. Most courts faced with this defense have concluded that an employer’s decision not to prosecute a non-compete claim in the past should not be a defense. The rationale is sound. Each enforcement decision naturally involves a combination of financial and other considerations unique to the individual in question. However, in circumstances suggesting an historic abandonment of the clause for an extended period, a court might be persuaded to at least consider past enforcement practices as a factor in judging an employer’s assertion that critically valuable interest are at stake that must be protected.
To be enforceable, non-compete agreements, like all contracts, require adequate consideration. For non-competes executed in connection with the start of employment, the consideration is the job. When the execution of the non-compete comes after hiring, some states will allow continued employment to satisfy the consideration requirement. Some states, however, require the employer to offer additional consideration in the form of a bonus, increased pay or other benefit. In those states, an employee may have a viable defense to enforcement if she was asked to sign the non-compete after she was hired but was not provided any additional consideration by the employer.
Employers sometime face a situation where the current employer is not the original contracting party but has “acquired” the employee and his agreement through an acquisition, merger or other corporate restructuring. If the employment or non-compete agreement has an assignment clause in it, this is not an issue. If the agreement does not have an assignment provision, state law will determine whether the agreement was transferred as part of the assets of the original company. If there was a non-assignment provision in the agreement which was not addressed in the corporate transaction, the employee may have a valid defense.
It can be extremely frustrating for an employer to have a former employee leave to work for a competitor and be unable to enforce the non-compete agreement. With some careful forethought and attention to drafting, many of the employee defenses discussed above can be avoided, making enforcement of the non-compete much easier.
About the Author
Lawrence F. Carnevale
Larry Carnevale is a partner at Carter Ledyard & Milburn LLP. Mr. Carnevale is the chair of the firm’s Litigation Department and Trade Secrets, Business Torts and Restrictive Covenants Practice Group.
About the Author
Judith A. Lockhart
Judith Lockhart is the managing partner at Carter Ledyard & Milburn LLP. She is the chair of the firm’s Employment Law Practice Group and a member of the Litigation Department and Trade Secrets, Business Torts and Restrictive Covenants Practice Group.
Reprinted with permission from the December 23, 2013 edition of Inside Counsel © 2013 A Summit Professionals Networks Publication. All rights reserved. Further duplication without permission is prohibited. For information, contact 212-221-9595 or visit http://sbmediareprints.com/.