Do Non-compete Agreements Really Protect You? The use of non-compete agreements has dramatically increased to protect employers from unfair competition. You should know when they’re appropriate and how to apply them correctly. John Wiley, an account executive for World Net Web Inc., an established network software provider, has been with his firm for 10 years. He was promoted to his current position eight months ago. In his current position, John manages accounts for more than 40 clients of World Net. However, it hasn't been easy for John. Along the way, he's had to fight the political scene at World Net to even reach his current position. And now, although he has attained an executive position at World Net, he still resents the red tape he endures each time he needs to make a quick decision for one of his client accounts. Recently, John has been approached by NetStart, a small start-up company that specializes in networking software, and asked if he would like to join their team as executive vice president. John has been eyeing NetStart since their entry into the network software market three years earlier. Thinking he could bring a majority of his client accounts over to NetStart, John decides to resign from his job at World Net and accept the position at NetStart. On John's last day, the general counsel of World Net enters his office. The general counsel reminds John that, pursuant to the non-compete agreement he signed upon his most recent promotion, for one year after his resignation date, he is not allowed to directly or indirectly compete with World Net within 20 miles of any location in which John did business for World Net. John disagrees, becomes irritated and asserts that the agreement won't stop him from moving to NetStart, nor will it dissuade him from using the knowledge he gained at World Net for his benefit at NetStart. The general counsel warns John that World Net will enforce the agreement by filing suit. Although the actors in the above scenario are fictional, the dilemma facing John, World Net and even NetStart is all too real. In recent years, the use of non-compete agreements has dramatically increased in the employment setting. "Non-compete agreements have increased in use because of the increase in the technology industry and the need for all companies, regardless of industry, to zealously guard trade secrets, marketing plans and other sensitive information that is specific to the organization and would give its competitors an edge;” says Anne Pasley-Stuart, president and CEO of Pasley-Stuart Consulting, a human resource consulting firm based in Boise, Idaho. As long-term employment relationships have dwindled and loyalty between employers and employees has declined, many employers have found non-compete agreements desirable to prevent unfair competition by former employees. With the increased use of these agreements, there's a corresponding increase in litigation over them. Steven Kayman, chairman of the NonCompete and Trade Secrets Practice Group at Proskauer Rose in New York City, explains, "There has been a general trend toward more ready enforcement of restrictive covenants, including non-compete agreements. To some extent, it's because there is a greater level of

consciousness among practitioners that non-compete agreements are out there and, to some extent, getting enforced by courts." What is a non-compete agreement? Though many people group all restrictive covenants under the umbrella term of "noncompete" agreements, there's a definitive distinction in the purpose, operation and potential validity of each type of restrictive covenant. "Many companies categorize all restrictive covenants as non-compete clauses. However, companies need to make a distinction between non-compete agreements and other restrictive covenants. If no distinction is made, there is a potential that one part of the agreement will be weakened," says Ethan Winning, president of E.A. Winning Associates, a management and human resources consulting firm in Walnut Creek, California. Non-disclosure covenants prohibit former employees from using or disclosing the employer's confidential or proprietary information. Non-solicitation covenants prohibit former employees from soliciting the employer's prospects and customers, and non-raiding clauses prohibit former employees from hiring the employer's other employees. However, a pure non-compete agreement is a provision in an employment contract or agreement by which the employee agrees not to directly or indirectly compete with the employer or work for a competitor after termination of the employment relationship. In short, the wording of such a clause may read something like: Employee agrees as a condition of employment that, in the event of termination for any reason, Employee will not directly or indirectly, either individually or as a principal, partner; agent, employee, director officer of any corporation or association, compete against the Company, or aid or assist any other person, firm or corporation in any business which directly or indirectly competes with the Company or any subsidiary corporation thereof in the United States. There will also be time, scope and geographic limitations included in the non-compete agreement. Generally, the purpose of a non-compete agreement is to protect the business interests of an employer from unfair competition by a former employee without imposing an unreasonable restraint on the former employee. Why would an employer want a non-compete agreement? As the United States continues its transformation from a manufacture-driven economy to a service-driven economy, the ability for employers to maximally protect their investment in company resources has become a focal point. Such resources include employees, research and development, client lists and other confidential or proprietary information which the employer has a legitimate interest in protecting against unauthorized disclosure or misappropriation. Thus, due in part to the unfettered access that many employees enjoy as a pure function of their jobs, employers are being forced to devise new ways of maintaining the security of proprietary information, trade secrets and other confidential information. Such pressure has led many employers to view post-employment non-compete covenants as the best method for

protecting their valuable confidential information and goodwill from misuse by former employees. In fact, the thought is that without such protection, employers could not afford to invest optimally in product development or in their employees, nor could there be a free exchange of ideas within a company. James W. Wimberly, a principal with Wimberly, Lawson, Steckel, Nelson & Schneider, a management side labor and employment firm based in Atlanta, observes, "The biggest benefit to an employer [would be] a situation in which the business would be devastated by the immediate transfer of an employee to a competitor, or having the employee start his or her business in competition with the former employer. A few employers have told me they've almost been run out of business by certain practices, and it's frustrating for them to hear that often there's nothing that can be done about the situation, in the absence of some type of an agreement with the former employee." However, non-compete agreements have traditionally been looked upon with disfavor. Why? The courts generally articulate two policy reasons for their disfavor of non-compete clauses: (1) the employee's right to sell his or her own labor and (2) the public's interest in unimpeded trade. The former policy reason recognizes that the employer usually has an economic advantage over the employee. Specifically, there is a concern that the employee, in entering into a non-compete agreement, may succumb to pressure and sign away the right to work in the employment realm for which the employee is most qualified. Therefore, due to the fact that noncompete agreements force employees to relinquish freedom to use information, customer contacts, and generalized skills they've acquired, these covenants restrain the economic mobility and personal freedom of employees. Based on such considerations, at least one organization, Affiliated Resource Group, a Columbus, Ohio-based company that helps growing and mid-market companies manage their information assets, has implemented a firm policy of not seeking or requiring non-compete agreements with its employees. Explains Michael Moran, president of Affiliated Resource Group, "Why should we hinder anyone's career? If someone is happy, challenged and properly compensated, they'll stay where they are." The second policy rationale recognizes the potentially negative impact of non-compete clauses on competition in the marketplace. Courts have noted that non-competition clauses restrain the free flow of ideas and information. Therefore, enforcement of such clauses may by be injurious to the general public by rendering employee skills developed during employment unavailable. When is a non-compete agreement appropriate? Despite the benefits a non-compete agreement affords an employer, non-compete agreements aren't appropriate for every employer or employee. The necessity of an agreement depends on such factors as the nature of the employer's business and the character of the employer-employee relationship. Pasley-Stuart of Pasley-Stuart Consulting emphasizes that

"non-compete agreements should be limited to those people who have positions that are sensitive and have access to confidential or proprietary information." For those companies whose survival is strictly contingent upon maintaining confidential or proprietary information, there seems to be an increased need for non-compete agreements. For instance, certain high-tech companies, such as computer and Internet organizations, are more likely to require non-compete agreements. Moreover, there are certain industries, such as insurance and securities, that have historically implemented a policy of requiring non-compete agreements with certain employees. Even certain occupations, such as sales, have a higher tendency to require non-compete agreements, due in part to high customer interaction. Even for those companies fitting with- in the above-mentioned description, before requiring any employee (temporary or permanent) or consultant to sign an agreement, it's advisable for the employer to focus on the nature and character of the employeremployee/consultant relationship. For instance, what amount of access does the employee have to the employer's trade secrets and proprietary information? What amount of access does the employee have to the employer's customers? What is the likelihood of grievous harm to the employee if the clause is enforced? What is the likelihood of grievous harm to the employer if a non-compete is not signed? An employer considering the necessity of a non-compete agreement should candidly and thoughtfully decide why such an agreement is necessary. Not all information learned during employment is truly confidential or proprietary. Not all competition by a former employee is unreasonable. Therefore, an employer shouldn't seek to obtain non-competition agreements from all employees across the board, nor even all employees of a particular job classification. Instead, an individual assessment should be made regarding the necessity for a non-compete agreement with respect to each separate job. "Most employers are convinced that everything they have is sensitive. So I always advise companies to bring in legal counsel to walk through what they really need and what they actually are trying to protect. Often, when you get a company to systematically go through what information they're trying to protect and how little it is and how few employees it really impacts, it can change the company's approach to requiring non-compete agreements," says Pasley-Stuart. When will a court uphold a non-compete agreement? Because of the impediment to free competition that a non-compete agreement involves, courts have generally been reluctant to limit an employee's freedom based on such provisions. Due to the employer's interest in protecting its information, the employee's interest in freedom, and the public's interest in promoting the free flow of trade, a balance between the competing interests must be reached in drafting an enforceable non-compete agreement. "The courts have traditionally and have continued to employ a highly fact-sensitive analysis in evaluating non-compete agreements. On one hand that makes sense because the facts do vary so much. On the other hand it creates enormous uncertainty for employees who want to jump ship or employers that wonder whether they ought to adopt a non-compete policy or should attempt to

enforce one if a former employee is violating a non-compete." The basic test of enforceability of non-compete agreements used by most courts is a measure of the reasonableness of the agreement under the particular circumstances. The employer must be able to articulate a legitimate interest which deserves protection, such as trade secrets, customer lists or other confidential information. The court deciding whether to enforce a non-compete agreement will decide whether the interests to be protected are reasonable and legitimate. The court will also weigh the hardship that might be imposed upon the employee, as well as the public at large, and the agreement must be no broader than is reasonably necessary to protect the employer's interests. Finally, a court will evaluate the reasonableness of the specific terms of the agreement, such as the duration or time limitations for the agreement, the territory or area in which competition is restricted what the employee received in exchange for agreeing to be bound by the non-compete agreement, and the circumstances surrounding the termination of employment. The law on non-compete agreements varies from state to state. For instance, non-compete agreements are generally unenforceable in California, Montana, North Dakota and Oklahoma. In other states, such as Connecticut, Minnesota and Illinois, the enforceability of non-compete agreements depends on the facts of each case. As a result of the varying positions states take on non-compete clauses, questions pertaining to the enforceability of a non-compete agreement in a particular state should be addressed to competent counsel familiar with that state's requirements. Says Winning, "Every state and within every state, every court and judge has their own personal idiosyncrasies when it comes to hearing such cases." Nonetheless, the general rule remains a rule of reasonableness of the agreement and its terms, under the unique circumstances of each case. What happens if an employee breaks the agreement? The most frequently invoked remedy for breach of a non-compete clause is an injunction that restrains the former employee from violating the agreement. An injunction is the favored remedy due to the fact that it appears to be the most effective method for eliminating the potential harm to the employer. Sometimes an employer may be awarded damages as a result of a breach of a non-compete agreement. In most circumstances, courts will find damage awards appropriate if a former employee has already injured the employer as a result of the breach. Historically, former employers have rarely enforced non-compete agreements due to the cost and uncertainty of enforcement. The existence of the non-compete served as a fallback in particularly egregious situations. "There is a wide variance to the degree to which companies seek to enforce their non-competes. Some companies will try to enforce every agreement and other companies will almost never try to enforce an agreement. Most are somewhere in between, evaluating on a case-by-case basis, and looking principally - and largely based on the advice of counsel - on their chance of success and how badly the former employee can hurt them," explains Kayman of Proskauer Rose. However, in recent years, due in part to the increased mobility of the American workforce, there has been an increase not only in the use of non-compete agreements, but an increase in the efforts of former employers to enforce such agreements. In fact, in some cases,

the former employee is also suing the subsequent employer for interfering with a contractual relationship, aiding and abetting a contractual violation and civil conspiracy. Further, while punitive damages generally aren't available in a suit to enforce a noncompete clause, a court may assess punitive damages against the subsequent employer. For instance, one court ruled that a business engaged in tortuous interference with a contract and was liable for punitive damages where it knowingly hired two individuals who had signed noncompete clauses with their former employer and then encouraged the employees to use confidential information in violation of that non-compete clause. What are the risks of requiring a non-compete agreement? One of the biggest risks of having a non-compete agreement is that of "running off" employees or potential employees who refuse to sign the agreement. In an age when good employees are getting increasingly harder to find, employers may be limiting their recruitment efforts. "In some instances, the employee may refuse to sign and will seek another job. And obviously, getting talented people now is difficult," says John Yates, an attorney who heads the Technology Practice Group of Morris, Manning and Martin in Atlanta. There's a school of thought that requiring employees to sign a non-compete agreement can set the employer-employee relationship off on a bad start, in that the agreement may impart a feeling of distrust between the two parties. Because of the difficulty and potential resentment of getting employees to sign a non-compete agreement, some companies have overall policies that forbid such agreements. Michael Moran of Affiliated Resource Group is in charge of such a company. In response to whether he's concerned about the potential exposure, Moran says, “The reason we aren't concerned with the potential exposure is because we try to have a good relationship with our clients and with our employees. Are we perfect? No. However, the impetus is on the company to provide an opportunity for the employee and to render a valued service to our clients." Even in states where non-compete agreements can be upheld, an employer will have to spend money enforcing such an agreement. In fact, a former employee may feel compelled to sue the former employer for a "declaratory judgment" as to the enforceability of the restrictive covenant. Accordingly, it's possible for the existence of such an agreement to increase an employer's legal bills, even in circumstances where the employer doesn't intend to enforce the agreement. Says Winning, "Non-compete agreements are going to be expensive and difficult to litigate." As the American economy continues to shift toward a service-oriented market, the value placed on a company's confidential and proprietary information will correspondingly increase. Due to the fact that a company's own employees can ultimately turn out to be future competitors, there remains a desire for companies to try to protect their legitimate business interests from misuse by former employees. However, the American free-market society thrives on competition and the free flow of

ideas. Consequently, there's a conflict. As a means of resolving the conflict by virtue of contract law, companies have pushed the use of non-compete agreements. Their role will be determined by those who request them, those who accept them and those who enforce them. Do Employees Benefit From Signing a Non-compete? In light of the fact that there are obvious disadvantages for an individual to sign a noncompete agreement, why would one do so? For many employees, it’s because it’s a condition of their employment – i.e., they won’t be hired or will be terminated if they don’t sign the agreement. Further, many employees sign non-compete agreements because they’re part of the numerous employment papers that they sign in the pre-hire process, and are probably told it is just a standard agreement that all employees sign or must sign. Others sign such agreements to show their loyalty, their intent to be a “team player.” Increased Responsibility Though certain drawbacks are part and parcel to a non-compete agreement, there are benefits, as well. Fundamentally, negotiated restrictions clarify the parties’ obligations. For an employee, the existence of the contractual limitations may assist the employee in long-term decision making and planning formulations. Furthermore, given the protections that are afforded by the restrictive covenant signed by the employee, the employee may feel that the employer is treating the employee as an integral element of the employer’s organization. To that end, the existence and security of the non-compete agreement may encourage an employer to use an employee who’s subject to such an agreement in significant and confidential business decisions and operations. “Some employers may be more likely to impart knowledge, training or responsibility to employees who are bound to the company by some type of noncompete agreement,” says James W. Wimberly of Wimberly, Lawson, Steckel, Nelson & Schneider in Atlanta. Increased Negotiating Power An additional benefit of negotiated contractual restrictions is that it gives an employee the ability to refuse an initial offer of employment or seek adjusted benefits to compensate for the negotiated restriction. In fact, some states require the employee to receive additional consideration, above and beyond mere employment, in exchange for a non-compete agreement. “In 30 to 40” percent of cases in which employees sign a non-compete, the employee recognized that it was a major give but wanted the job badly enough, or it was a negotiated provision in a truly negotiated contract where the employee gets something in return,” says Steven Kayman of Proskauer Rose in New York City. For example, an employee may receive a higher salary or increased fringe benefits due to the existence of the restrictive covenant. Or the employee may receive compensation beyond terminations of employment and throughout the

period the non-compete is in effect. Of course, for applicants or employees with a unique skill set or substantial knowledge base, the ability to bargain over the terms contained in the agreement or the amount of compensation is greater.

This article is intended to provide useful information, but should not be construed as legal advice or legal opinion. By Bradley T. Adler, www.workforce.com, December 1999