United States: Thou Shalt Not Use Non-Competition Agreements Solely To Prevent Competition

In today’s highly competitive marketplace, companies are becoming increasingly concerned about their employees – from the highest levels of management to the rank and file – leaving and going to work for the competition. As the frequency grows with which employees change jobs, the use of non-competition and non-solicitation agreements that prevent competitive employment and customer solicitation by former employees becomes more and more appealing.

Although the seemingly easy ability to prevent your employees from either working for a competitor or soliciting your clients may be highly attractive, employers cannot require employees to enter into these agreements for the sole purpose of prohibiting competitive employment. Courts are reluctant to enforce agreements that prevent an individual from engaging in his or her chosen occupation. Accordingly, a non-competition or non-solicitation agreement will not pass legal muster if its only purpose is to prevent "ordinary" competition, that is, to prevent employees from going to work for a competitive enterprise.

As a general rule, a restrictive covenant will be enforceable only if the restrictions it contains are (1) necessary to protect an employer’s legitimate business interests, and (2) reasonable with respect to the length of time the employee is barred from competitive employment and the size of the geographic area within which the former employee is prevented from working. Many jurisdictions also require that the restrictions be consistent with public interest.

So what legitimate business interests do courts consider worthy enough to permit employers to prevent employees from changing jobs freely, without restriction? Although there is some variation by jurisdiction, courts generally feel comfortable allowing restrictions to be placed on employees only when those restrictions are necessary to protect a company’s trade secrets, confidential or proprietary information or customer goodwill.

For example, in Nigra v. Young Broad. of Albany, Inc., 676 N.Y.S.2d 848, 848-50 (N.Y. Sup. Ct. 1998), the court refused to enforce a non-competition agreement that would have prevented a television reporter from working for "any commercial television station (including cable, closed circuit or pay television) that broadcasts or transmits to any place within the Albany-Schenectady-Troy area . . ." for one year after the end of her employment.

The station argued that the reporter’s appearance on a competing channel would cause the station irreparable harm because of her popularity, her broad-based experience and her "extensive knowledge of the local scene . . .." Id. at 849. The station also argued that the reporter had "‘established invaluable contacts and sources’" and that no one else possessed "‘the same knowledge of the local scene or the unique mix of qualities and characteristics.’" Id. Finally, the station alleged that the reporter had many "loyal viewers who would follow her to another channel." Id.

The court concluded that the station’s justifications for preventing the reporter from competing with it were insufficient to permit enforcement of the non-competition agreement because nothing about the competition the station sought to prevent was unfair. Id. The station’s desire simply to restrict competition, absent some indicia of unfairness, fell short of what was required to justify preventing the reporter from working in her chosen field in an entire region. Id. at 850.

In Concord Orthopaedics Prof’l Ass’n v. Forbes, 142 N.H. 440 (1997), the New Hampshire Supreme Court upheld the trial court’s partial enforcement of a covenant not to compete against an orthopedist. The covenant, as written, sought to prevent the doctor from practicing orthopedic medicine within 25 miles of any of the employer’s offices for two years after his termination. Id. at 441.

Reasoning that the employer had a legitimate interest in protecting its goodwill that had, in part, been developed by the departing physician, the trial court enforced the covenant, but only to prevent the doctor from competing for the employer’s existing patients. The New Hampshire Supreme Court agreed, concluding that the employer’s legitimate interests "generally extend only to those areas in which the employee had actual client contact" and refusing to allow the employer to prevent the doctor from competing for new patients. Id. at 443. The court, in effect, transformed the broad non-competition covenant into a specific non-solicitation covenant.

By contrast, the court in Bowne of Boston, Inc. v. Levine, No. CIV.A.97-5789A, 1997 WL 781444 at * 3 (Mass. Super. Nov. 25, 1997), enforced a non-solicitation agreement against Levine, a former Vice President of Sales. In that case, the agreement was narrowly tailored to prevent Levine from soliciting any customer who had been assigned to him or for whom he received sales credit within the prior two years for two years after the end of his employment. The covenant also prevented him from using his personal relationship with or the information acquired about customers, but specifically stated that he was not prohibited from accepting employment with a competitor. Id. at *1.

Reasoning that the goodwill belonged to the former employer and that Levine was, in fact, in a position to appropriate his former employer’s goodwill, the court concluded that the covenant went no further than protecting the employer’s goodwill and that it was necessary to protect its legitimate interest. Id. at *2-*3.

The first step in preventing your employees from leaving and working for the competition or from soliciting your customers is to have a well-drafted agreement.

The agreement should require the employee specifically to acknowledge the fact that he or she is coming into contact with confidential and proprietary information, trade secrets and goodwill, as the case may be. It also should require the employee to acknowledge that the restrictive covenants contained within the agreement are reasonable and necessary to protect your legitimate business interests and that injunctive relief is warranted because monetary damages will be insufficient in the event of a breach.

The agreement also should be drafted to be no more restrictive than is necessary to protect your interests with respect to its time and geographic limitations. Courts are loath to permit employers to overreach with respect to attempted restrictions, and this is one of the fastest ways to have your agreement deemed unenforceable.

Just as important, however, is that your ongoing behavior and company procedures with respect to confidential and proprietary information and trade secrets comport with the conclusions that the employer considers such information to be proprietary and that the restricted employee has access to this information.

For example, be sure that your confidential, proprietary and trade secret information is clearly labeled as such and that access to such information is limited to only those employees who need to know. This can be accomplished by keeping your information under lock and key or by password protecting any proprietary electronic information.

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.