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Non-Compete Agreements: Newest Trend in Litigation
by Jeff Mollet

Manager's Toolbox

When thinking about any attempt to limit an employee’s ability to move to another employer, here are a few things to consider:

1. For any contract to be valid, the parties must receive some consideration. The employment contract should spell out the consideration that the employee is receiving. It should be more than “getting the privilege to work here.” Without adequate consideration from both parties, no contact is enforceable.

2. Contracts that restrict the ability of an employee to seek employment with a competitor are generally only enforceable if they are reasonable in scope and duration and necessary to protect a material interest of the employer. A limit on the time and geographic area are the most common methods employers use to limit an employee’s ability to move to another job in the same industry. However, the restrictions cannot be so burdensome and broad as to prevent the employee from being able to make a living. This is a fact intensive determination and all parties should apprise themselves of the possible implications of such limitations during the contract negotiation process.

3. The “status” of the employee with the employer may be important. The more key the employee, the more confidential information they are exposed to or simply the “higher” up the management ladder, the more likely a restriction on the employee’s ability to compete will be seen as reasonable and/or necessary. Such a restriction on a line worker seems unreasonable while attempting to keep a vice president from moving to a competitor seems logical and almost required in today’s business environment.

4. The reason everyone is looking at the terms of the non-compete are also relevant. Did the employee voluntarily terminate to take position with a competitor? Was the employee fired and, if so, for what reason? Typically, employment agreements allow an employer to terminate an employee “for cause” and then define “cause.” It is less likely that a court will jump to enforce a non-competition agreement where the employee’s conduct was not the cause of the termination.

Victoria’s Secret vs. Famous-Barr. I know I have your attention now. This is actually the latest publicized case involving that time-honored legal creation--the “non-compete agreement.” At the heart of the Victoria’s Secret litigation was a claim that a former Famous-Barr employee could not go to work for Victoria’s Secret because of a non-compete agreement he signed. The defense lawyer successfully argued that the two were not competitors and the court agreed. Perhaps this is a somewhat surprising decision on the surface, which is why these cases are “all the rage” at present.

Typically, employers seeking to retain the services of executive or key employees will negotiate a non-compete provision as part of the overall employment contract package. The general idea is obvious and seems on the surface simple. Alas, we are in the legal world where words are merely an invitation for further interpretation. Thus, seemingly simple language and intent in an employment contract indicating that the “employee agrees to not own, operate or participate in any business that directly or indirectly competes with the employer’s business for two years after termination of this agreement . . .” leads to more questions than answers. What constitutes competition? How indirect can the relationship be? Is two years excessive? What is the employer’s business? The wide variety of facts, situations and effects leads to misunderstandings, disagreements and ultimately litigation.

What restrictions on competition should you look at? In some states, such restrictions are generally invalidated by statute except in limited circumstances. In states allowing such covenants, the courts are all over the board on what limitations are acceptable. In other states, the courts struggle to deal with the interest of the employee in continuing to make a living in a particular field versus the need for employers to protect their business interests and the confidential knowledge the employee amasses while employed. Thus, these areas are where conflict arises and litigation ensues.

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