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

October 3, 2016

Part two of our interview with Adam Herzog, a partner with the whistleblower and employment law firm Katz, Marshall & Banks, LLP, in Philadelphia. You can read part one here.

CP: I'm sure this can be quite expensive.

Adam: I would be hesitant to put a number on what it might cost. But litigation can always get expensive. The ultimate number can be dependent on the resources of the company involved. If they hire a giant law firm, they can try to drown the employee in litigation.

There are some agreements that specify that if the company does sue you for breach of the agreement and they win, then you have to pay their attorney fees. Hopefully in negotiating beforehand, an employee can make that attorneys’ fee provision mutual – such that whoever prevails in a lawsuit, the other side has to pay attorney fees. But companies are not volunteering to put that kind of language in agreements from the get-go.

CP: This probably gives companies a lot of leverage in situations like this.

Adam: Yes, unless a non-compete does have mutual, attorney fee shifting language, then they know the employee will have to pay out of pocket to defend any suit.

CP: At the field sales level, is there any room for negotiating an NCA?

Adam: I think it never hurts to try. It’s pretty rare that an employer would offer someone a job, and then if that employee says I would like the non-compete to be revised, that the the employer would be so offended that it withdraws the offer. At worst the company will say, “sorry this is a non-negotiable condition of employment”.

I have seen it happen where a company's HR person or the person in charge of non-competes hasn't given much thought to it for a long time. And if the employee can point out how something might be applied in an unfair manner then they might re-draft their agreement or make an exception. The company personnel may appreciate knowing that a provision may be too broad and may not survive a court challenge.

It is always better when a client comes in before they sign a non-compete. If the employee waits until they resign or until they are terminated, then the company has less reason to want to negotiate.

One of the things an employee can ask for is “termination without cause” language. Employers will usually draft non-competes to say they are triggered upon any kind of separation, whether voluntary or involuntary. Employees can suggest revising the non-competes such that they would only be enforceable upon resignation or termination due to the employer doing something egregious like steal from the company. But it couldn't be enforced due to something like a layoff or restructuring.

CP: It sounds like it is a good idea for an employee to have an attorney look over an agreement prior to signing it.

Adam: I think so. An employee could be caught off guard by certain terms, like when I mentioned the potential breadth of the word “affiliates” earlier.  The employee should want to know if certain provisions are likely to be enforced by the courts and attorneys may also have ideas about things employees can ask and negotiate  for in the agreement.

CP: You mentioned that the attorney generals in Illinois and New York got involved in the Jimmy John's case. Are there states that favor employees in NCA disputes?

Adam: The best example of a state that is favorable to employees is California. They essentially prohibit NCAs, though there are some narrow exceptions. Many companies in California do still issue NCA's even knowing they are unenforceable.

CP: What are the parameters or the facts that allow an employee to challenge an NCA in a particular state?

Adam: If you live in New York for example and the company has headquarters in Delaware, it is exceedingly unlikely that you could challenge the NCA in California. There has to be some connection to the location of the work and where the NCA is going to be applied.

Beyond that, almost every NCA will have a choice-of-law provision. So if the choice-of-law stated that the laws of New York that govern, even if you filed a suit in New Jersey, the courts in New Jersey would try to determine how a New York court would answer this question.

There can also be litigation over whether or not the choice-of-law provision is enforceable. There is a whole category of motions that address venue and choice-of-law disputes.

Courts will generally default to the parties’ choice-of-law as reflected in the agreement.  The employee would need to make an argument that the choice-of-law provision should not be followed; he or she could argue that the provision conflicts with the state’s public policy. For example, remember that in California, non-competes are overwhelmingly frowned upon.  A California court, then, would be unlikely to uphold a choice of law provision that would otherwise enforce a non-compete against a California employee who worked for a California employer.

CP: Are there any standard circumstances where an NCA would be invalidated? For example, would bankruptcy by the company invalidate the NCA?

Adam: Usually the courts would uphold the NCA in the case of bankruptcy if another company purchased the company out of bankruptcy. NCA's tend to be enforceable if there is a merger or an acquisition of the company’s stock such that the former company still survives as an entity.    

However, if there are multiple mergers and different divisions are sold to other companies then it is less likely that the non-compete would be enforceable. Another important factor is whether the agreement contains an “assignment” provision, although states differ on whether such provisions can be enforceable.  

CP: What are some of the methodologies that a court might use to invalidate an NCA – in part or in whole?

Adam: If an employee successfully challenges an NCA then they still might not get the entire agreement thrown out. A small majority of courts will do what they call an “equitable reformation”. In this case they will re-write the provision to make it enforceable. This will result in a narrowed restriction, but it may or may not be narrowed enough to make the employee happy.

Other states are “blue pencil” states. In these jurisdictions, the court doesn't rewrite the provision, they just cross out the parts that they find to be unenforceable.

Then there are red pencil states that say if any part of the agreement is unenforceable, then the whole agreement is thrown out. The thinking behind such a rule is that this will get employers to craft the agreement in a fair way from the beginning.

CP: How often do you find that NCAs are enforced at the field sales level?

Adam: I see it with some frequency; particularly where there is some concern the employee has protectable knowledge the company fears going to a competitor. This might be something like a customer list the employee has developed. Or if the company fears that customers may simply go with the employee to another company.

CP: Anything else you think employees should be aware of?

Adam: In terms of negotiating an NCA, I think it makes sense to tie a severance agreement to an NCA. If a company is asking an employee to sit on the sidelines and not work for some time period, then I think the company should pay them while they are not able to work. In practice it is very rare that the period would be a one-to-one match. But it doesn't hurt to explore this.

Another issue that comes up sometimes is a question if a NCA is enforceable if it is signed after an employee has worked for a company for a while. Some states will not enforce such an NCA.

CP: Adam, thank you for taking the time to talk with us. I think this will be very useful for our users.

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