Noncompete agreements are valuable tools. When properly used, a well-crafted noncompete can protect the employer from significant harm. On the other hand, when your new hire breaches a noncompete with his or her former employer, the liabilities can be substantial. In recent years, noncompetes have become political footballs in some jurisdictions, and many misconceptions have emerged.
Probably the most common misunderstanding is that noncompetes are no longer enforceable. Although they are restricted in a few states, noncompetes remain generally enforceable elsewhere. The general rule in the majority of states is that enforceability requires the employer to prove the following (each of these factors is case sensitive):
- The agreement is necessary to protect the employer's legitimate interests (for example, to protect confidential information or client relationships).
- The noncompete will not impose an undue hardship on the employee.
- It will not cause public harm.
Another common misconception among regional or national employers is that they should use the same noncompete in all states. State laws vary, and often significantly. States such as California, North Dakota and Oklahoma prohibit employers from entering into noncompetes with employees at all, but they are in the minority. In Pennsylvania, an employer must provide additional consideration, such as a meaningful bonus, if the agreement is presented to existing employees. This is quite different from New Jersey, where continued employment can be sufficient consideration to support the agreement.
Many employers erroneously believe courts will not enforce overly broad noncompetes and therefore err on the side of including less protection than they really need. But as a recent string of New Jersey cases reinforced, courts in some states have the authority to "blue pencil" (or rewrite) restrictive provisions the courts consider overly broad rather than refuse to enforce the entire agreement. While this does not mean courts will always save an overly broad noncompete that goes too far, the blue-pencil doctrine enables employers to write their agreements without fearing a perceived slight overreach will void the entire agreement.
If you are considering rolling out noncompetes to either current employees or new hires, it is helpful to have in-house or outside counsel review the drafts, work on a plan for rollout, and help you understand the ways the law varies in the states where your company does business.
Many businesses likewise have misperceptions about what they should do when hiring a new employee who is subject to a noncompete with a former employer. Many companies wrongfully believe they have no liability if the employee breaches the former employer's noncompete. Actually, a new employer can be directly liable, most often on a "tortious interference" or conspiracy claim, or on a "respondeat superior" basis (sometimes referred to as vicarious liability). In fact, even when the new employee violates the noncompete without the new employer's knowledge, courts in many states can still hold the new employer liable if it receives the benefits of that breach.
Even if the former employer does not sue the new employer directly, the new employer can easily become embroiled in costly litigation. Lawsuits involving breach of a noncompete usually start with the former employer seeking an injunction hearing (akin to a minitrial) in which it asks for a prohibition on the employee's working for the new employer until the matter is resolved through the court. This, in turn, requires the new employer to engage counsel, obtain witnesses and prepare them, gather documents, and engage in potential forensic analysis of electronic data, all in a very short time period.
So how can an employer protect itself when moving forward with a new hire? First, it is always important to ask a new hire if he or she executed a noncompete or another restrictive covenant with a former or current employer. If the answer is yes, obtain a copy and share it with legal counsel before hiring the employee. Counsel specializing in this area can advise on the enforceability of the agreement, as well as on whether there is a tendency to enforce or not enforce in that specific jurisdiction.
Your counsel may also want to ask questions about the employee's relationship with his or her employer, because certain facts might give rise to an argument that the agreement is unenforceable. For example, in New Jersey, if the employee was laid off or fired, this could give rise to an argument that the employer does not have sufficient grounds to enforce the restrictions.
Second, if you decide to hire someone subject to a restrictive agreement, have that employee sign an agreement not to disclose any restricted information or violate any rights of the former employer. That agreement should direct the employee to speak with a senior manager familiar with the employee's former agreement if the employee ever becomes concerned that performing his or her job might cause a violation of duties to the former employer.
Third, if you receive a "cease and desist" letter that threatens litigation, seek to determine if a lawsuit is likely. Legal counsel have access to federal and state court databases that they can use to help determine if that former employer sued other former employees in similar circumstances. Such information can be invaluable in deciding how to respond.
Fourth, experienced counsel can often work out these disputes. Waivers, buyouts or agreements to stay away from specific customers can often lead to settlements that avoid protracted and expensive litigation.
Noncompete litigation happens fast and requires immediate attention. New employers that plan ahead are typically best prepared if that time comes.
Originally published by SHRM March 2, 2020
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.