When You Have To Sign a Non-Compete Agreement - Discussion With An Employment Attorney (part 1 of 2)

September 29, 2016

Part of two of the interview can be found here.

It has become common for companies to require most employees to sign non-compete agreements (NCAs). Unfortunately these agreements can at times be overly oppressive and can unfairly restrict an employee from working for a competitive company.

To help our users understand some of the issues surrounding NCAs, we were fortunate to speak with Adam Herzog. Adam is a partner with the whistleblower and employment law firm Katz, Marshall & Banks, LLP. Adam represents employees and whistleblowers in disputes against current and former employers.  He regularly assists clients in negotiation with new employment contracts and separation agreements, with particular focus on severance terms and covenants not to compete,  Adam has obtained positive results for numerous clients with claims of violations of wage and hour laws, discrimination and retaliation, including under various whistleblower protection laws such as the Sarbanes-Oxley Act and  the False Claims Act.  He served as law clerk for the Honorable Judge Philip Simon of the Northern District of Indiana.   Adam earned his J.D. in 2004 from the University of Chicago Law School and his undergraduate degree in Finance in 2000 from the University of Pennsylvania – The Wharton School.

CP: Adam, thank you for taking the time to talk with us. To begin, maybe you could describe some of the current trends you see in non-compete agreements (NCAs)?

Adam: There’s been a strong push-pull lately with employers trying to become more aggressive and state legislatures and officials pushing back. One way employers are becoming more aggressive is by forcing employees farther down the organizational chart to sign off on non-competes. In the past it would have been CEOs and senior managers and directors. Now employers are more likely to require the least senior and  lowest paid employees in the organization to agree to these provisions.

One of the best examples of this is Jimmy Johns.

CP: I remember reading about that.

Adam: By default, they were requiring any employee to sign an oppressive non-compete that prevented them from working for any competitor within three miles. It meant that essentially you couldn't work in a city – at least one where Jimmy John's flourishes.

This was met with some resistance from Illinois and New York attorney generals. The Illinois case is still active but Jimmy Johns has settled the New York matter.   We’ve also seen an uptick in state legislation on this front – with several states, including Illionis, recently passing laws to prohibit employers from asking low-wage employees from entering non-competes.

CP: Are there any other examples or terms that, to the layman, might not appear as oppressive as they are in reality?

Adam: Yes, a lot of times employers might try to slip in that you can't work in an area or industry where an “affiliate” conducts business, or with customers that an “affiliate” tries to pursue. This can be very limiting, especially when you think of the size and complex organizational structuring of some companies, especially pharmaceutical firms.  Who knows how many affiliates or subsidiaries they may have? They may also develop new connections in the future.

So if you aren't on guard it can create a very wide restriction. Employers try to keep the language as broad and ambiguous as possible. I have seen provisions that simply say you can’t work for any company that competes with us – without defining what it means to be “competitive”.

I think a court would be reluctant to uphold such a provision because an employee could not determine what business he or she can conduct after leaving an employer.

CP: Are there limits to what can be in an NCA or can you agree contractually to give up virtually any protection?

Adam: There are limits. NCAs sort of hold a special place in law where private parties can’t agree to contract whatever they want. Courts are generally averse to allowing private parties to restrict someone's ability to earn a living. For that reason, courts have a set of guidelines they go by.

Every jurisdiction is different, but generally there are three categories that courts consider. Those are duration, geographic scope, and breadth of the activity that is restricted.

A good rule of thumb for duration is two years. That is generally the outside of what a court is usually willing to accept. An exception may be a CEO of Coke who wanted to work for Pepsi. In such an instance a court may be willing to allow a longer non-compete to take effect. One-year duration is usually in a safe zone. Up to two years they tend to be ok.

Geographic scope does not have as clear a rule of thumb as duration. This is more of specific fact dependent inquiry. For example, a sales person who only worked in one specific region; a court would be unlikely to enforce a provision preventing that person from working on the other side of the country.

In reference to your earlier question about trends, I would say that courts are more willing to accept greater geographic scope today because of the globalization of the economy. But it always comes back to the particular job and industry.

The guidelines on breadth are probably the least well defined. On one hand the courts are trying to figure out what legitimate interests the company has in protecting its business. It may have invested time and resources in the employee. The employee may have acquired company confidential information, trade secrets, and competitive business practices while working for the employer.  The courts recognize that the company has a right to protect that information and take steps to prevent the former employee from poaching company customers that he or she developed while with the company.  ard of the .

On the other side of the scale, the employee needs to make a living and the court doesn't want to allow for unreasonable restraints on trade. So it becomes a case-by-case analysis. Usually courts will read ambiguities against the company. The more provisions are targeted towards particular, narrowly drawn activities the more likely that the court will allow activity will be prohibited.

CP: What are the mechanics of how a non-compete issue winds up in court?

Adam: It’s the employee who usually finds himself a defendant. That is somewhat rare, as in other areas of law, for example disputes over discrimination and wrongful termination, it is typically the employee suing the employer.

What usually happens with non-competes is that the employee leaves and knowingly or unknowingly works for a company that the previous employer believes is in violation of the non-compete. So the previous employer  will sue and get on a “fast track” litigation by seeking a preliminary injunction or a temporary restraining order.

This can happen quickly. The court has to decide who is right or wrong and if they rule one way or the other now, which is more likely to cause harm that cannot be undone. So a court might conclude that if it lets the employee start working immediately for the competitor, the cat will likely be let out of the bag with respect to trade secrets and the disclosure of other employer legitimate interest.  If the court determines that such harm could not be undone at a later time after the parties have a chance to put forward their arguments in a full and robust litigation, it will likely grant the employer a temporary restraining order or preliminary injunction.  That’s one of the obstacles the employee will have to overcome – to show that working with the new company will not pose irreparable harm. Also the employee may try to show that the likelihood of the lawsuit's success is so remote that there is no way the judge could grant a preliminary injunction.

CP: When an employee is sued in a situation like this, is the company suing them seeking to prevent them from working for a competitor or is the company also seeking compensation for the breach?

Adam: Yes, to both. The company would seek a declaratory judgement or a preliminary injunction to order the employee to stop working for the competitor. It can also seek monetary damages against the employee for the economic harm rendered by the employees supposed breach of the non-compete.

To obtain damages, employers have to show how they have been damaged and what the damage entails to reach a calculable  number. The company may say it lost X amount of customers or lost a particular bid. It can seek compensation by suing  the employee, and even the employee's new company in certain circumstances.

Many non-competes require employees to tell potential employers about the non-competes to avoid this situation. Even without a disclosure requirementsI sometimes advise my clients employees to upfront with ttheir new employers about the existence of a non-compete.  This can help alleviate further complications down  the road.  For example, perhaps the employee and the new employer can modify the new position to stay clear of any non-compete restrictions.  Or, in some circumstance the  the new employer will back the employee and  help defend them from potential suit by the former employer

End of part one. Please find part two here.

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