By Michael T. O'Neil, Esq.
In today's competitive market place Non-Competition and Non-Solicitation Agreements for employees are becoming more and more popular. As recently as 5 or 6 years ago, Non-Competition and Non-Solicitation Agreements (for purposes of this article they will simply be referred to as "Noncompetes") were typically reserved for upper-level executives or employees with access to sensitive proprietary information. Today, however, Noncompetes are commonplace for employees on both the top and the bottom of a company's organizational chart.
Although there has been an increase in the number of Noncompetes being executed over the last several years, and consequently, an increase in the number of lawsuits stemming from Noncompetes, the Massachusetts Courts have stuck with the same basic approach in analyzing Noncompete cases. Massachusetts Courts do not provide any hard and fast rules as to when they will and when they will not enforce Noncompetes. They approach each case on a case-by-case basis using a fact intensive analysis and, at the end of the day, each case hinges on a simple judicial balancing test: does protecting the employer's business interest outweigh the employee's right to freely seek employment wherever they choose?
Although we have been asked many times to provide employers with Noncompetes that are "bullet proof", the simple truth is that no lawyer can guaranty that a Noncompete is going to be enforced. There are, however, a number of things that an employer can do to improve its chances. Here is a list of my top 5:
Employers should have a process in place for new hires to sign their Noncompete. It is best for the Noncompete to be executed prior to, or contemporaneous with, the new hire's first day of employment and that the Noncompete express, in no uncertain terms, that the employee's employment is conditioned upon the execution of the Noncompete (i.e., the new hire would not have been hired unless they agreed to execute a Noncompete and abide by its terms). A court is more likely to enforce a Noncompete that is executed at the commencement of employee's employment. Similarly, at the termination of employees' employment, an exit process should be followed. Every departing employee, for whatever reason, should have an exit interview. At the exit interview, the same questions will be asked to each employee based upon a checklist given to the interviewer, e.g., Where are you going to work next? Do you currently have possession of any company property? Have you downloaded or e-mailed or otherwise transmitted company proprietary information to a source outside the company? The exit interview should be conducted in a cordial manner and concluded by providing the departing employee with a copy of their executed Noncompete as a clear reminder of their obligations.
Employment Noncompetes typically get executed in one of two manners. On the one hand, there are blank form Noncompetes where employee's names are filled in by hand and buried in a stack of other documents given to the new hire by the employer's Human Resources department. The stack usually contains health insurance information, retirement and pension benefits, employee handbooks, etc. (Note: if you haven't guessed from the tone, this is the wrong way). On the other hand, the preferred hand, the better Noncompete, in its final form, is a product of negotiation among employer, employee, employer's legal counsel and employee's legal counsel. This Noncompete is narrowly tailored and customized for the specific employee and is formally presented to the employee for signature. This Noncompete is the one more likely to be enforced. Therefore, when a client desires a one size fits all type Noncompete that their employees won't feel the need to hire a lawyer to review, we advise that the best strategy for an enforceable Noncompete is the exact opposite tact. Employers should encourage employees to retain legal counsel to review the Noncompete before its execution and more importantly, employers should document the negotiation between the parties. From a cost perspective, we certainly appreciate and understand that not every Noncompete can evolve into a full-blown negotiation process between the parties and their legal counsel, but even companies on a budget should make an effort to allow some type of documented negotiated process prior to execution of the Noncompete.
Related to point #2 above, employers should make sure that their Noncompetes are narrowly tailored, employee specific and only protect against a specific, expressed and legitimate business interest. If a Noncompete is overbroad, the court will be faced with the decision to either tailor the Noncompete itself (a difficult task for a Judge unfamiliar with your industry and company) or invalidate the Noncompete as a whole. Because it is easier for a Judge to strike the whole Noncompete, particularly where the employer was the party that failed to make the Noncompete specific, the Judge is likely to simply strike the whole Noncompete. By employers narrowly tailoring the restrictions at the commencement of the relationship, they reduce the possibility of the court making the latter decision of invalidating the agreement.
Employers may offer to make certain payments during the Noncompete period in exchange for employee not competing. In most cases, it is the employer's option not obligation to make such payments, however, if employer chooses not to make the payments, then employee will not be bound by the Non-compete. For example, if employee quits on January 1, 2006 and was subject to a 12-month Noncompete, then employer would have the option of making 12 monthly payments to employee or to allow employee to freely seek new employment without restriction. This is a most effective means to increase an employer's chances of enforcing a Noncompete. Courts like to see some type of consideration being paid to employees during the Noncompete period in exchange for their promise not to compete with the company. The obvious downside is that it costs the employer some additional money for an employee that they no longer get services from. However, this additional cost is often offset by the avoided litigation costs of enforcing the Noncompete. The creative solution is often times tying an employee's severance package to a Noncompete.
In the event that an employee executes a Noncompete at some point after they have started working for employer and not as a condition to the commencement of their employment (as discussed above is the best practice), then the employee should be given some additional consideration in order to support the Noncompete. An employer should not rely on the continued employment of employee as consideration for signing the Noncompete. In other words, telling an existing employee to "sign it or your fired", while effective at the time and possibly binding, may not be enough to later enforce your Noncompete. Additional consideration, in its simplest form, means more money, however, other things such as time off, a promotion or a change in titles may satisfy the requirement of additional consideration. The same principles apply when an employee changes jobs within the company, e.g., promotion, lateral movement, change in location, change in scope of duties and responsibilities. A change in an employee's scope of duties and responsibilities may invalidate a Noncompete signed prior to employee's new scope of duties and responsibilities. The best practice for an employer is to re-execute Noncompetes once the employee's position has changed.
As with most things in law, there are very few certainties with respect to
Noncompete enforcement actions. The best thing that we can do as legal counsel
for employers, is to put the employer in the best position possible to enforce
their Noncompetes by carefully drafting and implementing each employee's
Noncompete.