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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 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.
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.
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.
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)