Employment Non-Compete Agreement? Don’t.

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Is Your Non-Competition Agreement Enforceable? - Greene & Hafer Employment  Law

Introduction

I’m sure a lot of people have been following the news and perhaps experiencing themselves the employee labor market the United States is currently experiencing. Recently, I had a friend reach out to me to ask about a non-compete contract his new employer had asked him to sign. I thought it would be beneficial to further research and share my findings with you all. Technological innovation is at the forefront of what most of us do everyday, but there is a dark beast looming in the shadows… non-compete agreements! I have chosen a jurisdiction to which hopefully has no relevancy in anyone’s life. The point is not in the specifics, but in the general findings, which I would urge readers to think about in reflection to their current circumstances.

So, what is a non-compete agreement?

A non-compete agreement is a legal agreement (clause in a contract) specifying that an employee must not enter into competition with an employer after the employment period is over, either in the course of employment for others or on their own. These agreements also prohibit the employee from revealing proprietary information or secrets to any other parties during or after employment.

Many contracts specify a certain length of time when the employee is barred from working with a competitor after they end employment. Employers may require employees to sign non-compete agreements to keep their place in the market. Those required to sign these agreements may include employees, independent contractors, and consultants.

What’s the big deal?

They give the employer control over specific actions of the employee—even after that relationship ends. Employees are also prevented from working for a competitor even if the new job wouldn’t involve disclosing trade secrets. These agreements, while certainly necessary in some cases, are usually overly burdensome and can hurt your future career prospects. In fact, California has gone so far as to ban the use of NCA’s (non-compete agreements) as a matter of public policy and provide legal remedies if an employer attempts to use them.

What to do if you're asked to sign a non-compete agreement | CNN Business

What should I look for?

An NCA is considered to be a partial restraint on trade, which has been sustained in Nebraska so long as they are ancillary to a contract of employment and necessary to protect the legitimate business interests of the employer. See American Sec. Services v. Vodra. The court determines the validity of a covenant not to compete upon whether the restriction is (1) not injurious to the public, (2) not greater than is reasonably necessary to protect the employer in some legitimate interest, and (3) not unduly harsh and oppressive on the employee.

It has been repeatedly suggested to evaluate the second prong first to determine if the restraint supports a legitimate business interest of the employer. There are three recognized legitimate business interests; goodwill, trade secrets, and confidential information. However, because it is the most popular, I will only address how goodwill applies in this case. Goodwill is the value which results from the probability that old customers will continue to trade or deal with the employer such that it becomes an engrained habit. See Vodra. To evaluate the reasonability of protecting goodwill, the courts consider the distinction between ordinary and unfair competition. Gaver. The distinguishing factor is the appropriation opportunity tendered by the employee through significant personal contacts. See id. If the resulting analysis proves, post-employment, the employee has the potential to compete unfairly, the employer has a legitimate interest in protecting their goodwill.

An employer gains goodwill when it renders favorable services to its clients such that it increases the probability that a client returns out of an ingrained habit. See Vodra. These favorable services might include time, effort, or resources expended by the employer in delivering the final product or service to the client. See id. Time, effort, and resources contribute to the likelihood of goodwill being established because they give clients a sense of value which develops the habit to return for further services.

Conversely, the Boisen court found that there was no goodwill to protect. 222 Neb. at 243. There, the employer was an aerial spraying service that mainly treated farms for invasive bugs. The employer stated that customers sought out his business, with no solicitation, and did “nothing” to retain those customers season to season. Hence, the court held that because there was no development in the business relationship other than the service performed, the employer did not have a legitimate business interest in protecting goodwill.

An employee has the ability to appropriate the employer’s goodwill when the employee conducts business and has substantial contact with clients such that the clients could come to regard the employee as more important in business dealings than the product or service of employer. See Vlasin. Substantial personal contact is the communication that can allow for the employee to become more valuable than the employer’s service or product. Vodra.

In Vodra, the court found that the sole contact with buyers was through the agents of the employer and the success or failure of the firms depends in part on the employee’s effectiveness of his business dealings. This nature of contact was so substantial such that some customers may be persuaded or very willing to abandon the employer should the employee move to a competing organization or set up their own business. See Vodra.

Two part test!

In Boisen, because the employer did not have the legitimate business interest of goodwill, the covenant not to compete was found to be unreasonable and unenforceable to restrict ordinary competition, specifically because the employer’s customers who the employee had no personal and business-based contact or the employer’s prospective clients. In Polly, there was a legitimate business interest in the goodwill, but there the court found the covenant not to compete unenforceable due to the lack of substantial contacts the employee had with the employer’s clients. The court held that restricting employees that do not work with or even know clients of the employer is unreasonable in protecting the goodwill of the employer. See Polly.

Noncompete Agreements Explained | legalzoom.com

How can I protect myself and my employment?

A covenant not to compete is greater than reasonably necessary (and thus illegal) if the time and spatial restraints are overly restrictive or prevents the solicitation of business from the employer’s clients that the employee has not had substantial contacts or done business with. See Polly, Vodra. Time restraints that are not greater than reasonably necessary allow for the prevention of solicitation of clients, up to and including the renewal period for the next business transaction. Spatial, or geographical, restraints are not greater than reasonably necessary when they prevent the solicitation of business to clients the employee had done business with and had substantial personal contact. See Vlasin. A renewal period for a business transaction might include yearly security services for a summer racetrack or an annual tax return preparation.

An NCA is also greater than reasonably necessary if it arbitrarily prevents the scope of employment for a given amount of time, or is overly broad. For example, in Boisen, the restriction was for a period of ten years, within fifty miles. See Boisen. The business services were contracted year to year, which one can infer is the renewal period, generally in the area of close proximity to the business. Although the court held that the employer was not entitled to a covenant not to compete, a distinction was made that even if a covenant not to compete, the length of time and geographic scope during which such employment or occupation is prohibited is unreasonable. See Id. Despite the potential inference made by the court on the unreasonableness of the time restriction, as the lack of goodwill precluded the validity of the covenant not to compete, it is useful to use the inference to set as a boundary as courts have not explicitly ruled on the time portion of a covenant not to compete alone.

Is Your Non-Compete Enforceable in Texas? – North Texas Legal News

Conclusion

Clauses such as “For three years after your employment with [Firm] terminates, you will not work in the field of [marketing] within the United States, on your own behalf or on behalf of an employer or other entity” are RED FLAGS. I hope that you can make your own conclusions about why this would be a troublesome clause and share in the comments why! Technological innovation also had a play in California’s ban of NCA’s as hopefully now you have a larger sense on why, without push back from employees or States, people can feel trapped by these agreements.

Are Non-Competes Enforceable in PA Independent Contractor Agreements? |  Houston Harbaugh, P.C.

________

Neb. Rev. Stat. Ann. § 59-1603 (noting partial restraints on trade are permissible so long as they are not greater than reasonably necessary)

American Sec. Services v. Vodra, 385 N.W.2d 73, 78 (Neb. 1986)

Gaver v. Schneider’s O.K. Tire Co., 856 N.W.2d 121, 127 (Neb. 2014)

H & R Block Tax Servs. v. Circle A Enters., 693 N.W.2d 548, 552 (Neb. 2005)

Vlasin v. Len Johnson & Co., 455 N.W.2d 772, 776 (Neb. 1990)

Polly v. Ray D. Hilderman & Co., 407 N.W.2d 751, 754 (Neb. 1987)

10 comments

  1. thanks for the takeaways! i will be signing a new contract soon and will be on the lookout for those red flags….. I’ve seen in my past industry where it was commonplace to have NCAs, but people broke them all the time, and I’d only heard of 1-2 instances where the company actually fought them on it. I’d have to imagine if the folks in this class get to “big shot” status (as they well should with the BC MBA in hand, that companies might have a much closer eye on such activity after the fact. Good to know if they have a case or not!

  2. Being in Finance in a tech company, I had to sign NDAs when taking my job as well. Every quarter before the results are announced I get a reminder of the NDA. I know many executives are affected by NDAs especially. Since they are knowing of the strategies are directions of the companies I think this makes sense. Thanks for the post, great insights.

  3. Wow thanks a lot for this legal take on how it could affect our careers in certain industries. This is a a legal aspect of my industry (retail tech) that I don’t have much insight into, but absolutely needed! Working in a small start up, NCAs have not come up… though I can see the corporate reasoning for IP purposes. I wonder how these legalities will fare as the lines continue to blur with the complexities of technology in business.

  4. I could see that especially when the development of technologies could be so vague, depending on what the project is, that keeping an NCA for three years could really hurt a person’s ability to work. Thank you for bringing this topic up, it’s really impactful. I would hate to get into a situation where my NCA was overly broad and then I couldn’t find meaningful employment in the field I enjoyed.

    1. It is definitely a good idea to consult with counsel (give us a call!) when you need to read an employment agreement. To be clear, though, an overly broad clause is unlikely to be enforced the way the employer intended, especially in markets like California and Massachusetts where NCAs are generally unenforceable. See my additional comment below.

  5. Excellent post, my fellow soon-to-be esq. My favorite quote from the Boisen v. Petersen Flying Service, Inc. case you cite is that the business went “wherever the bugs are.” 383 N.W.2d 29, 32 (Neb. 1986). Which, in context, meant that the company was not doing enough to avail itself of the exclusive-enough business model that would support a NCA.

  6. For those curious about NCAs in Massachusetts, see below:

    Non-compete agreements will be more expensive to utilize. Employers must offer the employee paid “garden leave” for the length of the restricted period of at least 50% of the employee’s highest base salary during the prior two (2) years (or some “other mutually-agreed upon consideration,” which the agreement must specify);

    Employers cannot require all employees (especially non-exempt employees) to sign non-compete agreements;

    Non-compete agreements may be void depending on the reason for separation. Employers cannot enforce non-compete restrictions against employees who have been terminated without cause or laid off, except when included as part of a separation agreement;

    The new law only applies to agreements entered into on or after October 1, 2018. Older agreements are not voided, but employers should consider revisiting the current agreements in place;

    Continued employment is no longer sufficient consideration. Employers must provide fair and reasonable consideration to support non-compete agreements signed after employment has commenced; [and]

    The non-compete agreement must be reasonably tailored. A non-compete agreement must: (i) be limited to a maximum one (1) year non-compete period (subject to a limited exception discussed further below); (ii) protect statutorily covered employer interests (i.e. trade secrets); and (iii) cover a geographical scope that is reasonable in relation to the employer’s protectable interests;
    The new law applies to employees and independent contractors alike. The new law specifically defines employee to include contractors and will also require employers to retool those agreements to the extent they include non-compete provisions.

    https://www.mintz.com/insights-center/viewpoints/2018-08-14-new-massachusetts-non-compete-law-goes-effect-october-1-2018

  7. I love blogposts that start with not one, but TWO legal disclaimers! haha. Nice work. Seriously, one of my colleagues say that non-competes are why Boston can’t really compete with SF in tech. The legal environment is too containing for the companies.

    1. Boston’s non-competes have been seriously tamed as of 2018 (see my comment and article cite above) — and the reason for that was to bolster its ability to compete (ha!) with SF.

  8. Applicable post! The excitement of starting a new job often overshadows the important of reading the fine print such as the non-compete clause. In my first job out of college I paid no attention to this and when I resigned to move to my second company, the first employer threw the rulebook at me. Its unfathomable to me that you should be restricted from working where you want and I believe the onus should be on the existing employer to retain you, not the other way around.

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