If you don’t understand the law of noncompetes, you are less likely to have an enforceable agreement. The below is a basic overview that I wrote for another site. If you have any questions on noncompete or nonsolicitation agreements in Massachusetts, give me a call at 617.338.7000.
What is a Noncompete?
A Noncompete (also called a noncompete agreement, a non-competition agreement, or a fair competition agreement) is a general term for a written agreement whereby an employee agrees that, after he leaves the employer’s employment, he will not take a job with a competing business. Noncompetes usually contain various other provisions to protect the employer, such as not allowing the employee to solicit customers of the employer after the employee leaves.
Noncompetes are seen most often in sales jobs (to protect goodwill, described below) and in high technology jobs (to protect confidential information and trade secrets, described below). Some jobs involve both of these issues. They are prevalent in other types of jobs and in various industries.
Are Noncompete’s enforceable?
Yes and no. It depends. Typical lawyer answers, but they are the right answers here. Noncompete agreements are enforceable, but only if they protect a legitimate business interest and only to the extent that the legitimate business interest is reasonably in need of protection. Forget about what your cousin Joe or your sales buddy down the hall says. Only a competent lawyer can tell you if a particular agreement is likely to be enforced.
“Noncompete” is somewhat of a misnomer because Noncompetes are not enforceable solely to prevent fair competition. Public policy is in favor of free competition and the courts, therefore, look at Noncompetes very carefully before they enforce them. Only two legitimate business interests have been recognized in Massachusetts: (1) confidential information or trade secrets; and (2) goodwill.
Confidential information and trade secrets are valuable business assets that are worthy of protection. For example, a high technology employer may have developed software, equipment, etc. If an employee were to go to work for a competitor, the employee might provide the information to the competitor, thus greatly harming the original employer.
Goodwill simply means the reputation of the employer in the mind of a specific customer. The customer has a good impression of the business and will continue to do business with the company. Courts recognize that a salesperson is the face of the company, and customers can associate the goodwill toward the company with the individual salesperson.
There are a number of other reasons why a court may not enforce a Noncompete. Each case is determined on a case by case basis. Courts are sensitive to the fact that employees need to earn a living. Accordingly, they may examine every aspect of the Noncompete and the circumstances surrounding the agreement, as well as the equities involved in enforcing the Noncompete and the potential harm to be caused to the employee and the employer. The agreements are “strictly scrutinized,” in the words of the courts.
Can a Noncompete be enforceable even if the employer fires the employee?
The answer is the same as above (it depends). Most Noncompetes will state that they are enforceable even if the employer fires the employee, but the court may find this to be inequitable.
Can an employer have its employees sign Noncompete solely to prevent future competition?
No. At last, a straight answer from a lawyer. As stated above, Noncompetes are a misnomer because they are not enforceable if there only purpose and effect is to restrict otherwise legal competition. There must be a protectable interest, as described above, for a Noncompete to be enforceable.
Are there any limits on a Noncompete?
Yes. The Noncompete will only be enforced, if at all, to the extent that it reasonably protects the employer’s legitimate business interests (things are different, however, if the Noncompete is tied to the sale of a business). For example, if an employer only operates in the Boston area, it is unlikely that a court would rule that the former employee could not work in Springfield. Also, a court will only enforce a Noncompete for set period, normally a year or two, sometimes three years.
Also, certain jobs are not appropriate for Noncompetes. For example, the courts will not enforce a Noncompete against a doctor. The reasoning is that patients should be able to choose their own doctor, and if a doctor was prohibited from working at a competitor (or prohibited from working with patients), the patient would not be able to choose the doctor. A similar rule applies to lawyers.
What advice is given to an employer to make their noncompete enforceable?
There are several considerations. The first is to carefully consider why a Noncompete is needed and what legitimate business interest is in need of protection. If confidential information or trade secrets are at issue, the employer must take reasonable steps to protect the information and treat it as confidential. Otherwise, no protection will be given. If goodwill is at issue, the Noncompete should contain specific nonsolicitation provisions addressing the specific danger the employer wants to protect against.
It is most important to have a well-drafted written agreement that is specific to the employee and the situation. Make sure the agreements are up to date with an employee’s job changes and changes in salary and other employment terms. Also, some courts are requiring separate consideration (a sum of money or some other benefit) over and above continued employment to make a Noncompete enforceable.
How can an employee get out of a noncompete?
There is no magic bullet. Unless your employer agrees to waive your noncompete, or unless a court rules that the noncompete will not be enforced, the noncompete will stick with you for its duration (typically one year). This can be burdensome because you should tell new employers that you have a noncompete agreement. Employers in certain industries will ask you if you have one. Even those employers who do not ask should be told if the new job will implicate the noncompete. Your new employer will not be happy with you if they receive a nasty letter from your old employer’s attorney if that is the first time that they are finding out about the noncompete.
How does the employer enforce the noncompete?
The employer should consult with a qualified attorney with experience litigating these types of cases. The attorney can assess the situation, review the noncompete language, and determine the best course of action based on the employer’s goals and budget. I do not recommend that you use a general practice attorney as there are many tricks of the trade that could make or break your case. Possible courses of action include the following: (1) do nothing because the Noncompete is likely not enforceable and/or because it will not be cost effective to enforce it; (2) start by sending a letter to the new employer demanding that they respect the Noncompete; or (3) filing a suit in court and asking for a preliminary injunction (described below).
What does the employee do if he is sued for violation of a noncompete?
The employee should hire a competent lawyer to defend the case and/or to try to resolve the matter with the employer. Ignoring the matter will not make it go away. Usually, the employee will have only a very short period time to respond to the employer’s request to obtain a preliminary injunction (described below).
What is a preliminary injunction?
It’s a fancy term for a court order telling someone that they cannot do something. You would be crazy to violate a court order, because you could face significant sanctions or even be subject to arrest and jail. In noncompete litigation, the employer will ask the court to issue an order that the employee cannot work for a certain employer or a certain class of employers for a certain length of time. These injunction requests are sometimes successful, and sometimes not. Much depends on the facts of the case, the strength of the agreement, and the skill of your lawyer.
Adam P. Whitney. 617.338.7000.
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