Richard Hunt, The Daily Record Newswire
Historically, many employers required executives, managers, sales personnel, technical staffers, and other important employees to execute a non-compete agreement restricting them from working for a competitor. However, other alternatives available to employers may accomplish similar objectives with less risk.
Non-competes often are unenforceable
A covenant to not compete is the most restrictive covenant, and increasingly subject to challenge or disfavor. Consequently, employers should consider whether they can achieve their goals by requiring employees to sign other forms of restrictive covenants that are less likely to be challenged.
The enforceability of non-competes varies by state. Some states, such as California, make non-competes void in almost all circumstances. Other states, such as Oregon, impose a number of conditions upon employers seeking to hold employees to non-compete agreements.
Oregon requires that the employer inform the employee in a written employment offer of the non-competition restriction at least two weeks before the employee's first day of employment. The employer must also show that the employee is exempt from Oregon's overtime laws, and earns an annual salary exceeding the median family income for a four-person family. Non-competes are unenforceable against employees who do not meet these criteria, even if they sign a non-compete agreement.
Increasingly, courts carefully scrutinize non-competes to determine whether they are necessary to protect the employer's business, goodwill or information. Courts look at the nature of the work performed and whether the non-compete restricts the employee from performing identical work for others or whether it is a broad prohibition of performing any work for a competitor. Courts also examine the geographic scope and duration of the agreement. If it is determined that the non-compete is too broad, the court may refuse to enforce the agreement as written.
Improve chances of enforceability
Promotions: In some circumstances an employer may have a greater chance of successfully enforcing a non-compete in instances where an employee is promoted. In such cases, even though the employee was not notified in advance of hire of a non-compete restriction, the employer can show: 1, the individual is being promoted to a new managerial or executive position; 2, there is a significant increase in compensation; and 3, the promoted employee is assigned new duties and greater responsibilities.
Invite the court to narrow restrictions: An employer may be able to avoid the consequences of a court refusing to enforce a non-compete as written by including language that invites the court to carve back the agreement so as to allow it to be enforced narrowly as to the nature of the work restricted, the geographic area subject to the restriction, or the length of the restriction. However, there is also a risk that the court will decline to modify the non-compete restriction and will declare it void without narrowing the language, in order to make it narrower in scope, geographic restriction, or length of restriction.
Consider alternative restrictive covenants
Employers may be able to accomplish many of the same goals as a non-compete by requiring an employee to agree to other restrictions, such as those against disclosure, use of confidential or trade secret information, or solicitation of customers or employees.
Confidentiality and nondisclosure agreements: Courts are more likely to enforce confidentiality restrictions (regardless of whether they are signed in advance of employment) because employers have protectable interests in avoiding misappropriation or disclosure of confidential or trade secret information.
In order to be a protectable trade secret, the company's information must derive independent economic value from not being generally known to the public, and must be subject to efforts to maintain its secrecy. Confidentiality covenants help employers establish that the information provided to an employee is confidential. Employers may also take steps to limit disclosure by marking data as confidential or by adopting a policy that limits the access, use or disclosure of information stored on electronic storage devices. Employers able to prove that such information, whether technical data, business information, financial information, pricing information, customer information or other information are trade secrets, may be able to obtain attorney's fees, double damages, and an injunction against disclosure.
Non-solicitation restrictions: In states such as Oregon, non-solicitation restrictions prohibiting an employee from soliciting customers or other employees are treated differently than non-competes. Thus, even in those circumstances in which a company seeks to bind its workers to a non-competition restriction, it should set out a separate provision restricting employees from soliciting the company's customers on behalf of a competitor and restricting an individual from soliciting current employees to go work for a competitor. Thus, even if the non-compete is declared unenforceable, the non-solicitation restrictions may still be enforced.
However, not all states treat non-compete agreements and non-solicitation restrictions differently. For example, except in very narrow circumstances involving the misuse of confidential information, California does not make legal distinctions between non-compete and non-solicitation agreements.
Non-compete isn't always the best option
In summary, obtaining non-competes may not always be the best option because those restrictions may be costly to draft, certain statutes impose many preconditions and hurdles to enforceability, and in the end, a court may rule that the non-compete is unenforceable.
In contrast, confidentiality and nondisclosure agreements are restrictions that typically may be imposed at the time of employment or during the course of employment, and are effective tools to protect companies' business interests. Similarly, in many circumstances separate restrictions against soliciting customers and employees, both during the term of the agreement and following an employee's separation from the company, may protect companies' business interests.
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Richard Hunt is a partner at Barran Liebman LLP. He advises and represents employers on a variety of matters, including non-competition and trade secret litigation. Contact him at 503-276-2149 or rhunt@barran.com.
Published: Wed, Oct 01, 2014
