Recent national attention on the issue of non-competition covenants has once again highlighted the question of what criteria are necessary for a court to enforce restrictions on former employees to engage in competitive activities. Several recent news articles have detailed reactions to employers’ requiring low-level employees, who do not have the ability to take meaningful advantage of competitive knowledge, to agree to non-competition covenants in connection with their employment. Predictably, government officials have reacted strongly. For example, although not enacted prior to the end of its session, both chambers of the Massachusetts state legislature recently passed bills that would have severely restricted the ability of any company to enter into non-competition agreements with any Massachusetts employee. While differences remained in the House of Representatives and Senate versions of the bill, the proposed new law would (a) severely curtail the maximum length of any non-competition agreement, (b) require the employer to continue some level of the employee’s salary during the restricted non- competition period and (c) set minimum salary or seniority requirements for the restricted employee. In light of these developments, this article discusses some of the requirements for an employer to create an enforceable non-competition covenant.
THE “REASONABLENESS” OF AN EMPLOYEE NON-COMPETITION COVENANT
A non-competition covenant should be carefully drawn to address and protect an employer’s genuine and legitimate interests rather than to provide blanket restrictions against an employee’s ability to engage in future business activities in his or her chosen field. It is useful, therefore, to be as specific as possible when defining the scope of the prohibited activity instead of simply prohibiting “any competitive activity.” Likewise, the chance of getting a court to enforce a non- competition covenant is enhanced if it covers only specifically-named competitors as opposed to “any competitive business.” A restriction is also more likely to be enforced if there is specific consideration provided; employers that have the option to either pay for the restriction or waive it at the time the employee leaves the company will have an easier burden if a court action becomes necessary.
1 While restrictions on an employee’s participation in a business that competes with an employer sometimes are set forth in a separate agreement, they are more often drafted as covenants in an employment or other employer- employee agreement. This article will use “covenants” to address restrictions on competition generally, and “agreements” with respect to cases in which the covenants appear in stand-alone employer-employee agreements.
2 A non-competition covenant is just one type of restrictive covenant. Others, such as customer or employee non- solicitation covenants, confidentiality and non-disclosure covenants, and non-disparagement covenants, are governed by other statutory and case law rules.
While the precise holdings vary from state to state,3 most courts also require that, among other requirements, the restrictions contained in an employee non-competition agreement be reasonable both (i) in geographic scope and (ii) in length of time.
A. Geographic Reasonableness
Courts consistently require that the geographic restrictions on where a former employee cannot work must be reasonable. These restrictions are typically expressed by reference to a certain state, county or city, or to a specified radius from one or more of the employer’s offices.
Whether or not a geographic restriction found in a non-competition covenant is “reasonable” will ultimately depend on the nature of the business involved and the necessity of the restriction to protect the employer’s interests. For instance, New York courts have found that a geographic restriction restricting the employee’s future employment within fifty miles of the employer’s offices was unreasonable in the context of an insurance brokerage business.4 On the other hand, in a different case, a New York court found a prohibition against working “in the United States altogether” was reasonable because the employer conducted its business primarily over the phone.5 In a similar manner, a Connecticut court found that a non-competition covenant was reasonable despite a lack of geographic scope where the business at issue had few potential customers and the employee had sales leads for such customers.6 This issue is particularly brought into focus in the context of internet-based businesses, which necessarily have a world- wide application. Here, courts may not be as likely in the future to be concerned about the scope of geographic restrictions, as they may be about whether the restrictions protect legitimate trade secrets and other truly confidential information and customer relationships, balanced against the public interest in freedom for the employee to seek other employment and for customers (including clients, patients and other product or service users) to choose from whom they receive products or services.
B. Temporal Reasonableness
Courts frequently focus on the reasonableness of a non-competition covenant’s temporal restrictions. Similar to courts’ analyses of geographic restrictions, the evaluation of whether a duration is reasonable will often depend on the facts and circumstances of the particular
3 Some states, most notably California, have a general statutory ban on non-competition covenants. See Cal. Bus. & Prof. Code § 16600; see also Colo. Rev. Stat. § 8-2-113.
4 Solomon Agency Corp. v. Choi, 2016 U.S. Dist. LEXIS 75949, at *17-18 (S.D.N.Y. May 16, 2016).
5 Natsource LLC v. Paribello, 151 F. Supp. 2d 465, 471 (S.D.N.Y. 2001).
6 Explore Techs. Corp. v. Killion, 2010 Conn. Super. LEXIS 2401, at *17-18 (Conn. Super. Ct. Oct. 8, 2010); see also Sylvan R. Shemitz Designs, Inc. v. Brown, 2013 Conn. Super. LEXIS 2397, at *20-22 (Conn. Super. Ct. Oct. 23, 2013) (finding nationwide prohibition on competing employment not unreasonable due to nature of business, but declining to enforce non-competition agreement for other reasons). employer/employee relationship. The geographic and temporal analyses are often intertwined as part of a multi-factor analysis.7
EMPLOYEE SENIORITY AND WAGES: A NEW “REASONABLENESS” REQUIREMENT?
While courts have historically required that an employee non-competition covenant relate only to the legitimate business interest of the employer (e.g. its customer lists, trade secrets and other truly proprietary or confidential information),8 recent mainstream press coverage and government enforcement actions have focused on the wages and relative bargaining powers of the employee and the employer. For instance, the New York Attorney General’s Office recently announced that it had forced sandwich chain franchisor Jimmy John’s to stop including sample non-competition agreements for low-wage restaurant workers and delivery drivers to its franchisees.9 In announcing the settlement, the Attorney General called such agreements “unconscionable” and “unlawful.”10 The Wall Street Journal recently highlighted the practice of legal news publisher Law360’s enforcing non-competition agreements with even its lowest-level editorial staff.11 Even the White House and the United States Treasury Department have taken note of employee non-competition agreements of late, highlighting their potential overuse against low-wage workers, who are unlikely to possess trade-secret information about the employer.12
In light of this renewed negative attention, particularly with respect to low-wage or low-seniority employees, businesses should consider whether standard “form” employment agreements containing non-competition covenants should be re-written or eliminated to stand up to public scrutiny.
7 Xplore Techs., 2010 Conn. Super. LEXIS 2401, at *14-15 (citing Robert S. Weiss & Assocs., Inc. v. Wiederlight, 208 Conn. 525, 529 n.2 (1988)).
8 BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389 (1999).
9 “A.G. Schneiderman Announces Settlement With Jimmy John’s To Stop Including Non-Compete Agreements In Hiring Packets”, available at http://www.ag.ny.gov/press-release/ag-schneiderman-announces-settlement-jimmy- johns-stop-including-non-compete-agreements (June 22, 2016).
11 Aruna Viswanatha, “Legal Publisher in Settlement to Drop Noncompete Agreements for Employees,” The Wall Street Journal, available at http://www.wsj.com/articles/legal-publisher-in-settlement-to-drop-noncompete- agreements-for-employees-1465963260 (June 15, 2016).
12 Ryan Burke, “What You Need to Know About Non-Compete Agreements, and How States are Responding,” The White House, available at https://www.whitehouse.gov/blog/2016/05/05/what-you-need-know-about-non-compete- agreements-and-how-states-are-responding (May 5, 2016).