Five Mistakes To Avoid in Drafting Non-Compete and Non-Solicitation Agreements

noncompete contactsEmployers often seek business protection by entering into agreements with employees that restrict their business activities after leaving employment. Such agreements may prohibit former employees from using confidential information, from soliciting customers or employees, and from competing against the employer.

Time is of the essence when an employer learns that a former employee is violating his or her contractual obligations. Typically, the employer will quickly send a “cease and desist” notice to the employee and to his or her new employer. In some instances, the employer will also seek an expedited order in court that prohibits the former employee from engaging in conduct that violates the agreement.

When an employer asks a court to restrain the business activities of a former employee, it must demonstrate that it has a legally protectable interest. In deciding whether to order a former employee to cease certain activities, the court will consider whether it is “fair” to do so, and give careful consideration to the underlying agreement between the parties. Restrictive agreements are drafted by the employer, usually without negotiation with the employee. An employer that has not given careful consideration in drafting its restrictive agreement will likely not succeed in obtaining court relief. The following are five mistakes commonly made by employers in drafting agreements that contain post-employment restrictions:

Overbreadth
To be enforceable, a restrictive agreement must be reasonable in scope. Although the courts in some states may rewrite an agreement that has unreasonable restrictions on a former employee, other courts will simply find the agreement too broad and decline to enforce it.

A restrictive agreement may only seek to protect the employer’s legitimate business interests or goodwill. It would be unreasonable, for example, for an agreement to prohibit a race-car technician from working in any aspect of the automotive industry. In that instance, the employer’s business would not be affected if the former employee were to accept a new job selling automobiles, and a court would likely not enforce such a restriction. A restriction prohibiting the technician from going to another race team during the same race season, on the other hand, would likely be enforceable.

To be enforceable, an agreement must also be reasonable in geographic scope. For example, a court may find reasonable and enforce a restriction that prohibits a hair stylist from competing within the same downtown area, but not a restriction that prohibits working as a hair stylist anywhere in the continental United States.

Restrictive agreements must also be reasonable in duration. A restrictive agreement that extends for too long a time period will not be enforced. State case law and, in some states like Florida, statutes provide guidance on what a court will likely find reasonable for a particular job position.

Match the Agreement to the Position
Many employers adopt exceedingly broad boilerplate language in their restrictive agreements. An employer’s failure to tailor the agreement to the position may lead to unenforceability.

In a recent Massachusetts case, an appellate judge reversed the lower court’s order prohibiting entry-level sales employees from competing in the business of selling trips to students. The employer argued that its former employees, who were hired without previous industry experience, were violating their agreements by using its proprietary and confidential information to compete. The employer defined “confidential information” very broadly in the agreement. The appeals court, however, found the employer’s assertion that these entry-level sales of employees were violating their agreements because they had been involved in strategic business planning and development was “implausible.” The appellate judge vacated the order prohibiting the salespeople from selling trips for another employer. The employer may have fared better if the agreement was crafted to define the information that it expected entry-level employees to actually receive, rather than relying solely on a broad definition of confidential information.

noncompete agreementsFailure to Account for Jurisdictional Differences
Some multi-state employers develop a model restrictive agreement and use that agreement in all of its locations. This approach avoids the administrative burden associated with multiple agreements, but can have unintended consequences if the employer does not review operative state law beforehand. Each state has developed its own law on the enforceability of restrictive agreements. In addition to court precedent, some states have statutes that define when and how such agreements are enforceable. Failure to account for state-law nuances in drafting may mean that the agreement will not be enforceable.

Employers often try to avoid the impact of state law differences by selecting in the agreement the law of a particular state to apply. This choice of law may or may not work, depending on whether the court determines it is appropriate to apply the law of another jurisdiction to an individual defendant who may not have worked in the state chosen by the employer.

Failure to Take Job Changes Into Account
In some states, courts will not enforce restrictive agreements where job changes have occurred since the agreement was signed. Courts have found that significant job changes, like a transfer to a different business unit, a promotion, or a material change in compensation, alter the nature of the relationship between the parties and render the restrictive agreement obsolete and unenforceable. Even where there have not been significant job changes, employers sometimes seek enforcement of agreements signed by long-term employees. A court considering the fairness of a situation may be reluctant to enforce an agreement signed years ago, particularly where the employee can allege that he or she may not even remember signing it.

Employers should update their agreements, or at least have employees affirm their existing agreements when there are job changes, and at regular intervals. When drafting agreements, employers should include language that the agreement will remain in full force even if there are significant job changes.

Defining “Solicitation”
When drafting restrictive agreements, employers usually seek to prohibit former employees from soliciting customers or employees. Employers are sometimes dismayed to learn, however, that an agreement prohibiting only “solicitation” did not define the term in a way that would permit a court to order that the former employee’s activities are in violation. For example, an agreement that provides only that the employee will not “solicit” allows the former employee to argue that the customer or former co-worker contacted him or her first, and that he or she therefore did not affirmatively “solicit” in violation of the agreement. Where permissible under state law, employers are better served by language that spells out that the employee may not interview or hire a former co-worker, or have communications with a customer for the purpose of obtaining business.

Employers should also make clear that the prohibition on solicitation also includes “indirect” solicitation. Otherwise, a former employee may argue that by using a third-party intermediary to determine whether the former co-worker or customer would be interested in speaking would not be a violation of the agreement.

The rush to action that occurs when an employer believes that a former employee is violating his or her restrictive agreement is no time to realize that the employer could have been more careful in drafting. Prudent employers will develop an overall strategy to protect their business, and draft agreements carefully ahead of time so that protection is available if and when it is needed.

 

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2 Responses to Five Mistakes To Avoid in Drafting Non-Compete and Non-Solicitation Agreements

  1. Michael Mellars says:

    So, then, would legal fees as a result of an alleged breach of a non-compete be covered by an EPLI policy?

  2. Pingback: Non-Compete Agreements in Illinois | Naperville Business Law Attorney

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