United States: Protect Your Sales Force: Non-Competes Are On The Rise

Employers have a number of factors to consider before they ask sales people to sign a non-compete agreement.

In recent years, the medical device industry has seen a steady rise in non-compete litigation. Manufacturers and distributors alike are increasingly using restrictive covenants to protect their client base and workforce. Medical device sales representatives form strong relationships with their colleagues and the physicians they service, and they can utilize these relationships to divert seven-figure revenue streams.

Employers can protect against this risk through the use of restrictive covenants, such as non-compete and non-solicitation agreements, and other customer-based restraints. There are, however, no national standards for these agreements as state law generally governs them. Moreover, the law varies significantly from state to state, and changes are on the upswing as many states are passing new legislation to address these agreements. Employers who operate in a multi-state environment must carefully craft their agreements to ensure they comply with applicable laws within the states where they will be used.

Best Practices for Utilizing Restrictive Covenants

Do not use an agreement you found online. Do not blindly use the agreement used by your competitor. Chances are, the agreement has not been tailored to meet applicable restrictions where you operate, and your efforts to enforce it when it comes time to litigate will be incrementally more expensive as you battle to convince the court that the flaws in your contract are not fatal to its enforcement.

So what should be the first step? Identify those employees who should be required to sign a restrictive covenant. Not all employees present the same type of threat; while it may seem easier or more efficient to have all employees sign the same agreement, a one-size-fits-all approach is fraught with risks. Utilizing contractual restraints that do not match the threat presented by an employee may lead a court to rule that the agreement is unenforceable. For instance, while it may be advisable, or even imperative, that sales representatives sign a customer non-solicitation agreement, the same covenant may not be necessary for an engineer who has little to no client contact.

Next, employers should consider the type of protection required for each category of employee based on the threat presented. For example, employers may not need a full-blown non-compete that prevents an employee from working in the industry when a non-solicitation agreement that precludes solicitation of customers or employees would suffice. Most courts disfavor non-competes, and they will scrutinize such agreements due to the burden placed on an employee who could be put out of work in the industry for a period of time.

Employers also need to consider the scope of the covenants they use, both in terms of time and geography as courts set limits on both. Courts regularly enforce restraints that last for twelve months, provided they are otherwise appropriate, because they provide employers with sufficient time within which to reassign customers to a new employee and secure client relationships. Employers should consider how long it will take to hire and train a replacement, and also allow that replacement to demonstrate his or her competence to the customer base. Limiting the agreement to a specific geographic area may not be necessary if the restraints are limited to a specific group of customers, but if a non-compete agreement is utilized (i.e., a restraint that precludes an employee from working for a competitor altogether), the geographic scope needs to be limited to the area within which the employee can do unfair harm. Note the word "unfair." Restrictive covenants cannot be used simply to preclude employees from competing. They need to be used to prevent "unfair" competition, such as competition that exploits trade secrets or goodwill acquired at the expense of an employer. Determining the appropriate geographic scope is a fact intensive analysis that requires careful consideration.

Finally, employers should ensure the covenants they intend to use comply with requirements unique to the states where they will be used. Many states have non-compete statutes that lay out specific requirements, and all states have criteria specified by courts (known as common law). Non-compliance with either may render the entire agreement unenforceable.

Conclusion

In short, use of restrictive covenants by medical device manufacturers and distributors is on the rise, but many fail to take the necessary steps to ensure the agreements will be enforceable. Employers should consult experienced non-compete and trade secret counsel to ensure compliance with the myriad of nuances in state law. Doing so will maximize prospects for enforcing agreements and heighten the chance of avoiding unnecessary legal expenditures when litigation arises.

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.

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Authors
Michael R. Greco
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