January 18, 2012

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Article

Iron-clad Non-compete Agreements

Will Your Agreement Hold Up in Court?

Keith A. Call

January 18, 2012

If you are an employee who thinks your non-compete agreement is unenforceable, think again. If you are an employer who thinks your non-compete agreement is enforceable, think again. The world of non-compete agreements is a tricky place. The law is often murky and inconsistently applied. The changing business climate, including the emerging and ever-dynamic trend of e-commerce, raises novel issues to which precedent-bound courts must try to adapt. Fundamental concepts like “free market competition” and “freedom to contract” come into direct conflict. This has led to many misperceptions—and expensive lawsuits—concerning the enforceability of non-compete agreements. These misunderstandings can be especially painful because they usually involve touchy personal issues of trust, loyalty and independence. The good news for employers is that courts will enforce properly drafted non-compete agreements. The good news for employees is that employers often fail to properly draft such agreements, and courts will not enforce them if they are imposed for an improper purpose or are overbroad in their scope. Legitimate Business Purpose Speaking generally, courts will enforce non-compete agreements only if they serve a “legitimate purpose.” Such purposes include the protection of trade secrets or company goodwill. A Utah statute defines a “trade secret” as information that “derives independent economic value from not being generally known to, and not being readily ascertained by proper means” and “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” It is therefore important for employers to have in place controls against unnecessary disclosure of potential trade secrets. A former employee is not expected to simply “forget” general knowledge, information or skills gained during the employment. Goodwill can include a likelihood that the employee may draw away customers (and perhaps employees) from the employer if he were permitted to compete. Courts will often consider whether the employee rendered services that were in some way special, unique or extraordinary. Reasonable Time and Space Limitations Courts will not enforce non-compete agreements that are unreasonable in scope, such as being too long in duration or extending beyond the employer’s geographic area or market space. Much of today’s non-compete litigation centers on these amorphous concepts, making it critical for the agreement to be properly drafted. There is no bright-line test by which to determine what a reasonable period of non-competition would be. The employer should consider, for example, how long it would take for a replacement employee to establish the customer goodwill the employer seeks to protect. In most situations, a period of five years will not be enforced, but a period of six months to two years will often (but maybe not always) be enforced. Every case is different, and courts will likely continue to struggle with what is “reasonable.” As for spatial or market restrictions, courts have historically examined whether the non-compete agreement prohibits competition outside of the employer’s geographic market or the geography in which the employee worked. As geographic boundaries become less relevant, many non-compete agreements focus less on territorial restrictions and more on customer identities, customer groups or activity restrictions. These restrictions must also be determined on a case-by-case basis. Keep in mind that courts are loathe to prevent anyone from making a living in his or her chosen field. Thus, the more restrictive the agreement, the less likely it is to be enforced. Adequate Value for Promise The law requires that there be adequate value exchanged for a promise to refrain from competition. In legal jargon this is called “consideration.” The standard for demonstrating consideration in Utah is low. Generally, an offer or promise of continued employment will be adequate consideration to support a non-compete agreement, although a valid argument could be made that some additional consideration, such as a signing bonus or severance payment, should be required. It is critical to avoid bad faith or coercion in negotiating non-compete agreements. Courts will not enforce such agreements if it appears they are the product of bad faith or coercive negotiating tactics. Public Policy Former employees may also attack the validity of a non-compete agreement based on public policy concerns. Public policy is generally described as a standard of public interest that, if violated, would have a significant detrimental effect on the best interests of the general citizenry. This line of attack is often used by doctors and other providers of personal services, but this area of the law is not yet well developed in Utah. A Warning about Trade Secrets Even if you don’t have a written non-compete agreement, employers can still protect their legitimate trade secrets. The law prevents anyone, including current and former employees, from misappropriating trade secret information, even if no written agreement exists. The keys are proving (or disproving) a genuine trade secret exists and proving (or disproving) the trade secret was taken and misused. Non-compete agreements and other employee agreements are often used to include protections against misuse of trade secrets. Such agreements can also be used to broaden the scope of protected information to include things the employer deems confidential even though they may not qualify under the statutory definition of a “trade secret.” But information that is generally or publicly known is not protected by the law and cannot normally be protected by contract. Whether you are an employer or an employee, it is dangerous to assume that every non-compete agreement is, or is not, enforceable. Following the guidelines contained in this article, and obtaining advice from someone knowledgeable in the field if necessary, will help you navigate this murky and dangerous area of the law. Keith A. Call is a shareholder at the law firm of Snow, Christensen & Martineau. He can be reached at kcall@scmlaw.com.
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