Tighten up those non-competes!


I love to litigate employment disputes. And restrictive covenant cases are at or near the top of my list. They are fast-paced, usually well-lawyered on both sides, and lucrative. The primary goal of the dispute is to obtain a preliminary injunction — quickly — to stop someone from working. That means obtaining, organizing, and presenting an entire lawsuit worth of evidence in just months or weeks.

As the proponent, the company seeking the injunction must convince a judge that it will likely prevail on the merits, i.e., that the individual defendant(s) violated their agreement(s). That starts with having an enforceable restrictive covenant agreement.

Which can be easier said than done.

Over the weekend, I read a recent federal court decision involving a company in the business of testing and inspecting petroleum and petrochemicals that tried to enforce noncompetes against four former employees who went to work for a direct competitor.

Among other things, the Agreements contained identical clauses (“the Noncompete Clauses”) which provided, in pertinent part:

[D]uring the term of my employment and for the 12 month period following my termination of employment with [Employer], for any reason or no reason and whether employment is terminated at the option of me or [Employer], I agree and covenant not to engage in any Prohibited Activity within any State to which I was assigned to work during my last 12 months of employment at [Employer].

For purposes of this non-compete clause, “Prohibited Activity” is activity to which I contribute my knowledge, directly or indirectly, in whole or in part, as an employee . . . or any other similar capacity to an entity engaged in the same or similar business as [Employer], including those engaged in the business of petroleum and petrochemical laboratory, inspection and analysis services. . .

Right off the rip, I see two problems with enforceability here.

First, most courts will only enforce noncompetes when there is a legitimate business reason to do so because judges are reluctant to stop individuals from earning a living. This agreement broadly prohibits employees from working for competitors, seeming in any capacity (rather than in the same or substantially-similar capacity as their former job). Indeed, the Defendants argued that the language “prohibits them from working in any capacity for any entity engaged in the same or similar business as Plaintiff, even if the work is not competitive with Plaintiff’s business—including, for example, working as a secretary or janitor.”

Second, there’s that “I contribute my knowledge” language in the Agreement. As written, the Defendants would not be able to use any knowledge they obtained from any source from the beginning of time to a competitor of the Plaintiff. That seems rather broad too.

Perhaps, Plaintiff should have drafted the Agreement to read, “I contribute my knowledge the employee learned while employed by [Employer].” But that’s not what it says. And courts generally don’t like to rewrite noncompetes that the party seeking to enforce them could have drafted better initially.

Considering both points, the judge concluded that “the practical effect of the Noncompete Clauses is a prohibition against Defendants working, consulting, or even volunteering with [Employer’s] competitors in any capacity. The court cannot envision a position in which an employee could work for a company without “contribut[ing] [the employee’s] knowledge, directly or indirectly, in whole or in part” to that company.” Therefore, the judge determined that the noncompete was “overbroad and unreasonable.” And the court declined the opportunity to revise the noncompete to make it reasonable and enforceable.

While your mileage may vary on the enforceability of noncompetes from state to state — some won’t enforce them at all — the general rule of thumb is that lawyers should draft noncompetes narrowly (in scope, geography, and duration). Companies should use them only when they have a legitimate business reason.

There are alternatives to noncompetes, like nonsolicitation or nondisclosure agreements, that companies should consider instead of noncompetes. (Again, your mileage may vary depending on the state). Given the narrower scope of these alternatives, they are more likely to reasonably protect the business’s legitimate interests.

And ultimately, the court is more likely to enforce them.

“Doing What’s Right – Not Just What’s Legal”
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