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The employer does not want the employee to learn the business and the names and needs of its customers, only to run off and start a business of his or her own in direct competition with the employer.
Generally speaking, a covenant not to compete is legal and enforceable. Here is an example. This provision was in a contract for an executive, but it could be used for any key personnel:
“For a period of three years after the termination of employee's employment, the employee shall not, directly or indirectly, own, manage or participate in the ownership or management of or be connected with any business which is in competition either directly or indirectly with the Employer in those geographic areas in which the Employer has conducted or is conducting a material portion of its business.”
One court equated such covenants to the protection of valuable property rights.
“The good will of a business, including contracts with its dealers and representatives and confidential information such as names and addresses and requirements of customers, and the advantage acquired through representative contact with the trade in the area of their application, is a property right which an owner is entitled to protect.” Miller v. Ortman, 136 N.E. 2d 17 (Ind. 1956).
The concept here is that the employee's knowledge and abilities have been enhanced in his job by having access to client lists and other confidential information. The ex-employer then has the right to restrict the employee's use of this information where it may be used to divert business.
All of these are justifiable goals of the employer. But what of the employee? It seems unfair to tell someone that, by the fact of his employment with one company, he cannot later go to another company in the same industry.
New York's position on this question is typical of other states.
“New York disfavors the enforcement of restrictive covenants because there are 'powerful considerations of public policy which militate against sanctioning the loss of a man's livelihood' and because enforcement is contrary to New York's policy of promoting free trade.” McKay v. Communispond, Inc., 581 F. Supp. 801 (S.D.N.Y. 1983).
These are the competing philosophies, however, each state has it own statutes and case law that must be consulted for any specific set of facts. Some statutes are broad, as in Wisconsin, which finds that covenants not to compete are enforceable “only if the restrictions imposed are reasonably necessary for the protection of the employer.”
In other jurisdictions, there are multiple tests that must be satisfied before a covenant not to compete is upheld.
The following comments are generally true throughout the United States. For an employer, there are several considerations for requiring a noncompete agreement, and for enforcing it when it is breached.
°How confidential is the information that needs protection?
°Can the information be obtained readily from another source?
°What efforts do you expend in developing customer loyalty?
°Do you have unique methods for estimating (for example, maintaining historical averages for manpower usage per activity)?
°How much do you invest in advertising?
°How unique are your customers' needs?
°How much employee training do you have, whether in-house or through seminars, conferences, etc.?
°What is your percentage of repeat business?
°Have you invested in marketing plans?
When going through these questions, you may find that printed materials are more important than information. Estimates, drawings, estimating manuals and other materials may be among those papers you do not want copied when your employee leaves.
The noncompete agreement can be expanded to include a prohibition against copying and removing printed matter. You may already have procedures in place that address this issue for copyrighted computer software (AutoCAD, Accubid, Primavera, etc.).
Overreaching is a death knell to restrictive covenants. Where the agreement purports to cover the entire United States, or its duration is for an extended period, it becomes less likely to be enforceable even with justification. The territory covered and length of time of the restriction must be reasonable in relation to the information being protected.
Last, there is good law that a noncompete agreement must be supported by consideration. To have a contract, three basic elements must exist: an offer, an acceptance and consideration (an exchange of something of value).
Where a noncompete agreement is required at hiring, the courts view the promise of future employment as the consideration. However, if the covenant is not presented until later in employment, with no additional benefit conferred, it may fail for a lack of consideration. In this situation, something more is needed, such as a pay increase or additional benefits.
It may be that noncompete agreements are more powerful in the threat than in reality. Enforcement of these agreements can be expensive and unpredictable in outcome, but the thought of enforcement may be enough to keep an ex-employee from being too overt in ignoring the agreement. Similarly, a letter to the next employer warning him of a violation of the covenant may forestall intentional breaches. EC