Non-Compete are enforceable… for now

Have you heard the term “Non-compete Agreement?” If you’ve been in an employee-employer relationship or industry, you may already have an idea about non-competes. But what exactly is a Non-compete Agreement?

Brief Introduction to Non-Compete Agreements

A Non-compete Agreement is an agreement between an employer and an employee. It may also extend to an Independent Contractor Agreement, which is an agreement between the hiring company and independent contractors. Whether you’re an employer, employee, or independent contractor, you should understand the context of Non-compete Agreements. Non-competes are generally enforceable, but the laws surrounding them might be changing. 

Purpose of a Non-Compete Agreement

You may ask, “what’s the purpose of Non-compete Agreements?” Companies use non-competes and other non-restrictive covenants, including non-solicitation and confidentiality agreements, to protect their assets’ value. These assets may be intellectual property, trade secrets, proprietary information, or goodwill. 

Non-competes are governed by state law (right now), and reasonable non-competes in most jurisdictions are completely enforceable. A Non-compete Agreement typically benefits the company by providing them with greater assurance that their intellectual property, confidential resources, and proprietary information won’t be made available to or used by a competitor, even if that competitor is an employee or independent contractor that goes off on their own. 

Although Confidentiality Agreements, federal laws, and state laws also protect trade secrets and other intellectual property, those mechanisms generally don’t prohibit former employees from working for competitors. This is where Non-competes Agreement are different. Non-compete Agreements are particularly useful to employers in the case where an employee or independent contractor has access to valuable confidential information and trade secrets.

Limitations of Non-Compete Agreements on Enforceability

So, you already have basic knowledge of the Non-compete Agreement and its purpose. Let’s now talk about its limitations on enforceability. 

Not all non-competes are enforceable. Enforceability is a question of state law, and it varies significantly among states and industries. Courts and most states recognize that non-competes that prevent an individual from making a living or creates an undue hardship for them to make a living are unreasonable and therefore unenforceable. However, Non-compete Agreements will be valid if they align with the heart of why non-competes exist to protect the value of a company’s investment in trade secrets, confidential information, goodwill, or employee training. 

Non-Competes and Independent Contractors

If you hire an independent contractor who will be working directly with your clients, there’s a reasonable incentive for you to protect that relationship you’re creating. 

When an independent contractor is working face to face with your clients, these independent contractors are likely also interacting with your company (and your clients’) confidential information, intellectual property, and trade secrets. For this reason, I encourage your Independent Contractor Agreements to include a non-compete (and of course a confidentiality clause).

Again, non-competes aren’t meant for “done for you’‘ services where the independent contractor is providing services only for your business. You may hire them exclusively for a certain period, but you’re not going to prevent them from providing their expertise to other businesses. 

Industry-Specific Limitations

It’s important to note that there are industry-specific limitations on non-competes. Treat these more like red flags, allowing you to look at the different state laws to fill in the gaps. Here are some of the common limitations:

  • Restrictions on non-competes in the legal profession
  • Enforceability issues related to the healthcare profession in some states
  • Broadcasting limitations and restrictions on non-competes for people in the broadcasting field (this exists in Arizona)
  • Restrictions in Hawaii on the technology sector’s non-competes
  • Federal concerns related to the financial industry employees

If the above limitations and restrictions don’t fall into your line of work or industry, know that you will likely only be subject to the reasonableness standard (so that it does not create an undue hardship for them to make a living). So, what should you be considering when drafting a non-compete? Keep reading…

Things to Consider when Drafting a Non-Compete Agreement

Non-compete agreements should be drafted to address particular circumstances for the employee-employer relationship or the independent contractor-company relationship. 

Here are some of the things to consider when drafting Non-compete Agreements:

Customers Serviced by the Employee or Independent Contractor

One thing you can consider limiting the scope of the prohibited activity is “what your employee or independent contractor can and can’t do.” You may likely want to focus the scope of the prohibited activity on customers serviced by the employee or independent contractor or were with the company during the time of the independent contractor relationship or the employment relationship. For this reason, prospective customers can be hard to define. 

Current or Former Employees

Another thing you might want to consider is working with current employees or employees who left the company within a defined period before the employer or independent contractors’ departure. Essentially, what you’re trying to prevent here is them from teaming up to start something of their own. As discussed earlier, you need to prevent undue hardship from the competition. 

However, I want to make sure that we’re being reasonable when talking about competition—something that the law will protect as a public policy standard because it’s good for the economy. You should consider what it would look like to name specific competitors or have them compete within a specific mile radius. It’s so common to see the layers of the prohibited activities limited to a certain mile radius or those activities being done for certain direct competitors.

How to Prevent the Use of Your Training Investments

A common question I receive from my clients is, “how do I prevent them from using the training that I invested in the coaching support that I provided during their time with our company?” The answer to this is you can’t prevent them. This is why non-competes are important for protecting your investments, including in professional training. . 

Now, you can’t strip what someone has learned or prevent them from using the tools of the training you provided. However, you can prohibit knowledge to support teaming up with past employees, working for a direct competitor, or within a certain radius from your company location.

Liquidated Damages

A non-compete should be coupled with clear liquidated damages, because it creates a tangible consequence for breach. Liquidated damages is a clause in a contract that says it will be hard for us to assess the true damages, so we are going to agree to an amount or calculation ahead of time.

Two of the possible damages you can consider are the percentage of revenue made by disregarding the prohibited activity or a flat rate per day during the breach. These are both good options, but the right one for your business will depend highly on the circumstances, your industry, and the impact the breach may cause to your bottom line.

Legal Updates You Need To Know About

On July 9, 2021, President Joe Biden signed an executive order on promoting competition in the American economy. Among other things, this executive order encourages the Federal Trade Commission (FTC) to make it easier for people to switch jobs by banning or restricting non-competes. 

Specifically, the executive order seeks to address agreements that may unduly limit a worker’s ability to change jobs. The chair of the FTC is encouraged to consider working with the rest of the commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit workers’ mobility. 

When they released this executive order, there was also a press briefing. The press briefing says that roughly half of the private sector businesses require at least 30 million employees to sign non-competes. This affects construction workers, hotel workers, and blue-collar workers—not just high-level executives. The president also believes that if someone offers you a job, you should be able to take it.

For some, that might make sense for entrepreneurs because you might be concerned about your investment in the employee, your intellectual property, your confidentiality, and your goodwill. So, the FTC is currently considering adopting rules that will “limit and curtail” Non-compete Agreements. 

Our team isn’t quite sure about these rules, but what we know is that the federal government is attempting to preempt state law on non-competes. The executive order doesn’t require any immediate action by employers, so rest assured, we’ll stay on top of these updates.

Key Takeaway

As a business owner myself, I want to encourage you to protect your intellectual property, confidential information, trade secrets, investments in your team, and the goodwill you’ve worked so hard to earn. To do so, consider a non-compete as a viable solution because until the FTC makes a decision, we know that a reasonable standard is still going to win.

I hope this blog has inspired you to set clear expectations and protect your business at all costs.

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11/29/2021

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Non-Compete are enforceable… for now

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