The following article originally appeared in the March 2013 edition of The Myers Report newsletter published by the firm.

 

Business Handcuffs – The Non-Compete Agreement

Part I

By Jane M. Myers, Esq.

 

The summer I turned 16, I was hired by the phone company to deliver phone books door-to-door. It sounded like the perfect job: I could make my own hours and work on my tan. There was no cap on income – the more phone books I delivered, the more money I made. At 5¢ per delivered phone book, things were looking really good. (Yes, I know some of you reading this have no idea what a phone book is…)

On the first day of work, I loaded so many phone books into my parents’ Plymouth Valiant that the undercarriage sagged to barely three inches off the ground. This was going to be some job! The way I saw it then: I was my own boss with unlimited income potential. The way I see it now: I make it a point to try and forget that in addition to my parents providing the car, gas, and insurance, they would also have to replace the car’s shock absorbers. I try to forget that after eight days of wilting in the sweltering heat, hauling all those phone books around, and hunting fruitlessly for non-existent addresses, I quit my “perfect” job.

I also try to forget all those undelivered phone books that ended up stacked to the ceiling in my parents’ garage.

End result: that year, residents of many parts of Suffolk County had to rely on memory to make phone calls.

Now, imagine that I wasn’t some high school kid delivering phone books. Assume instead that I was an employee entrusted with a company’s trade secrets, customer lists, and confidential information, or that I had unique skills that benefited the company. How would that have impacted on what happened to me after I left my job?

In this issue of The Myers Report, we’re going to talk about business handcuffs – or what is known in the corporate world as the Non-Compete Agreement.

Whether or not an employer has a legitimate business interest to protect with a Non-Compete Agreement depends entirely on the specific circumstances.

Clearly, my summer job was not the type of situation where a Non-Compete Agreement was appropriate. The phone company didn’t have to be concerned that I would:

• set up a competing phone company;
• misappropriate its proprietary/confidential information or trade secrets;
• solicit phone company customers; or
• entice other phone company employees to quit.

So, when does a Non-Compete Agreement come into play?

Usually an employee is required to sign a Non-Compete Agreement when the job necessitates that the employer reveal its proprietary/confidential information, trade secrets, business “know-how”, or proprietary customer lists to an employee in order for the employee to do their job. In that situation, the employer is extremely vulnerable. The way to keep the employee from potentially damaging the employer’s business is to have the employee sign a Non-Compete Agreement. Typically, the Non-Compete Agreement is signed as part of HR’s “routine paperwork” on the first day of work.

Many employees pay little attention to it when they sign. But they pay a lot of attention to it when they’re looking to change jobs and find out they might be restricted.

On the flip side, many employers assume their Non-Compete Agreements are iron-clad only to find that, if tested in court, they would not be enforceable.

Keep in mind that an enforceable Non-Compete Agreement can be a very powerful tool to protect a business from competition – it can restrict an employee from working in a particular line of business, for a period of time in a particular geographic area. It is specifically intended to control an employee’s actions and limit choices. However, a poorly drafted Non-Compete Agreement isn’t worth using to wrap fish.

For these reasons, a Non-Compete Agreement should be carefully drafted in the first instance and carefully reviewed before it is signed…unless your employee is a16 year old delivering phone books for the summer.

In the next issue of The Myers Report, we’ll look at why courts do not favor restricting employees generally and what a Non-Compete Agreement must contain in order to be enforceable.

 

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Please note that this article is intended only as a general discussion of issues pertaining to non-compete agreements and that it should not be taken as creating an attorney-client relationship or as legal advice with respect to any particular person, business or situation.  Circumstances and the applicable legal principles vary and you should consult with an attorney regarding any questions you may have regarding your specific situation.