United States: Non-Compete Agreements: What Are They? Who Should Sign Them? Why Would You Use Them

Last Updated: March 19 2014
Article by Michael P. Elkon

Restrictive covenant agreements have become a major feature of the business landscape in the United States. If you are a lawyer, then all you have to do is do a search for the term "non-compete" on Lexis or Westlaw and you can find tens of thousands of hits as the case law on these agreements proliferates. Or, if you are a layman with a functioning Internet connection, you can simply type the term "non-compete agreement" into Google and you will learn that the country's most popular search engine has returned 10,400,000 results.

  • Restrictive covenant agreements are often referred to as "non-competes," even though a non-compete provision is only one form of a restriction that can be found in a full agreement. For instance, an employment agreement will often contain a non-compete (employee cannot compete in a certain geographic area) provision, as well as customer and employee non-solicitation paragraphs and a non-disclosure of confidential information restriction. Because of the common use of the term "non-compete agreement," I will use that term and "restrictive covenant agreement" interchangeably in this article, even though the latter is more accurate.

When I ran this search while writing this article, the first three results on Google are paid advertisements for free non-compete agreements. One such web site asks a series of questions and then spits out a draft agreement.

To see whether there was any legal substance to the site, I answered the questions so as to produce a five-year non-compete agreement interpreted under California law. The site then dutifully gave me just what I asked for, despite the fact that California has an almost-complete ban on non-compete agreements in the employment context.

This little exercise is useful to illustrate the first maxim of using non-compete agreements: Just because you draft it and an employee signs it doesn't mean that a court will enforce it. In most contractual contexts, courts will not second-guess the deal struck by two parties.

However, there are exceptions to the rule of deference to contracting entities. One such instance is the signing of a non-compete agreement by an employee. Courts often pay attention to the disparity in bargaining power between an employer and employee, especially when an employee signs an agreement at the outset of employment, a time when everything appears to be rosy on the horizon. Few employees start a new position thinking about what is going to happen when the job ends, so courts will often intervene to save employees from their own willingness to cede too much in a restrictive covenant.

The way that courts address non-compete issues varies based on the jurisdiction, which illustrates the second maxim of using restrictive covenant agreements: State law variations are critical. Some states have outright prohibitions on the use of non-compete restrictions in the employment context. Some states allow judges to mark through offending paragraphs, but do not allow judges to modify or rewrite the restrictions. Some states allow judges to modify the provisions, but leave that right up the discretion of the court. And then some states require that judges modify restrictions to make them reasonable, so even if an employer shoots for the moon with a restriction, it can do so secure in the knowledge that a judge will have to bring the provision back to earth.

Thus, knowing the law of the state in which an employee will work and adapting the agreement to that state's legal regime is vital. Additionally, some states have requirements that impact the process of having employees sign restrictive covenant agreements, so the process matters, as well as the substance.

For instance, there are a number of states that set forth that only certain categories or employees can sign restrictive covenants, or that some employees cannot be subject to non-compete paragraphs, although they can be subject to other restrictive covenants. This affects the procedural aspects of rolling out agreements. It also hits on a third maxim, which is that an employer needs to think through which employees should be signing particular agreements. For an employer in the hotel industry, there are a variety of options:

  • Most lower-level employees do not have exposure to confidential information or key commercial relationships, so they would not need to sign an agreement or, at most, they would sign an agreement specifying their obligations to return company property at the end of their employment.
  • Some white collar employees have access to a lower level of confidential information regarding the operation of a hotel business, but are not exposed to key commercial relationships. These employees would need to sign an agreement that restricts them from using or disclosing the company's confidential information, as well as requiring that they return company property at the end of employment. An employer should also include non-solicitation of employees, since most states give great deference to these provisions.
  • Moving up the organizational chart, a hotel employer can use additional restrictions to stop employees who work in group sales and are charged with developing commercial relationships with large organizations for the bulk buying of hotel rooms from exploiting those relationships on behalf of competitors. The minimal approach here would just be to restrict sales employees from soliciting business from the customers with whom the employees dealt when working for the prior employer; the maximal approach would be to forbid the employees from performing similar sales functions in a particular territory and/or on behalf of specific competitors.
  • Finally, the higher-level employees should sign agreements with all of the major restrictions: non-compete, customer non-solicitation, employee non-solicitation, non-disclosure of confidential information and return of property. A hotel employer can restrict its executives who play a role in planning the direction of the business from taking the high-level information that they learn from developing and discussing business plans, then go to work for a competitor. The non-compete restriction can be tied to geography, i.e. the area for which the executive had responsibility when working for th employer, or (in some states) it can be competitor-based, stopping the executive from performing similar functions on behalf of specific rivals. As opposed to other industries, the hotel business has high barriers to entry, so preventing executives from going to specific competitors has value, as it is highly unlikely that the executive will be able to create his own competing entity.

The key question for a hotel employer to pose to itself is "can this employee hurt my company if he/she moves to a competitor and, if so, how would he/she do so?" An honest answer to this question will be a useful guide in determining the particular covenants that should govern an employee's conduct after the end of employment. An employer also needs to ask itself about the cultural effects of rolling out new agreements. Some companies have a tradition of using non-compete agreements such that employees are used to signing them; others do not have that tradition and therefore need to use care to avoid generating employee dissension.

There are a number of reasons why a hotel employer would choose to use restrictive covenants with its employees. The most obvious reasons are that these agreements can be used to protect the employer's most critical information and relationships. However, there are other, less obvious benefits:

  • Restrictive covenant agreements can deter an employee from moving to a competitor. An employee who really wants to leave is going to do so no matter what. However, for an employee who is going through a bad period, the existence of a restrictive covenant can deter that employee from making an impulsive move. Likewise, a non-compete agreement can prevent an employee from making a move solely for a short-term gain or, in a related scenario, it can deter a competitor from trying to hire the employee who is subject to the agreement. It is likely that a hotel employer will never know what moves its non-compete restrictions deterred, but that does not make the value of the covenants any less real.
  • Restrictive covenants help employers show the existence of trade secrets. An employer does not need an agreement in order to stop its former employees from using or disclosing trade secrets. Trade secret protection exists under either statutory or common law in every state. However, one of the necessary elements to proving the existence of a trade secret is to show that the holder took reasonable means to protect the secrecy of the information or material in question. An employer can show reasonable means through a variety of different methods: physical security, IT policies, exit procedures, etc. One of the most common elements upon which employers rely to show reasonable means is a restrictive covenant agreement that stops employees from taking various steps on behalf of a competitor.
  • Restrictive covenants help to educate employees. Some employees take a self-serving view of what they own as compared to what their employers own. "I made it, therefore I can do whatever I want with it" is a not-uncommon sentiment, especially after an employee's time with a company ends. The concept of "your employer was paying you to make it, therefore your employer owns it" can be ignored, either willfully or unintentionally. When an employer has an employee sign a non-compete agreement that details the information and materials that the employer values most highly, the employer is educating the employees on this subject. By doing so, the employee who would inadvertently retain and use company property will be less likely to do so. The employee who would intentionally do the same cannot claim that he/she was unaware of the consequences.

In closing, restrictive covenants can be a powerful tool for employers for a variety of reasons. However, as with most powerful tools, it is important for an employer to use these contracts responsibly. An employer needs to make sure that its agreements protect its interests in the least burdensome manner possible. Even the states that are pro-enforcement of restrictive covenants will look at this factor. An employer also needs to pay attention to state requirements for both the substance of the restrictions and the procedures by which they are signed. Lastly, an employer needs to think through the optics of the roll out so as to minimize the grumbling that can sometimes result from using restrictive covenants. An employer that pays attention to these factors will find itself in the best possible position to protect the relationships and information that form a large portion of the company's list of assets.

This article by Michael Elkon was featured in Hotel Executive.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Michael P. Elkon
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions