IP Protection Tip #5: The Rare Use of Non-Competition Agreements

Posted on March 23, 2012

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Article Highlights:

• At its most basic form, a Non-Competition Agreement is wherein the employee agrees that they will not compete against the employer after the employment relation ceases.

• Non-Competition Agreements have always been controversial because restricting the job choices of a previous employee flies in the face of at-will employment.

• Employers do have a right to protect the business. In certain situations, an employer has invested substantial money in employee training, devoted a good deal of trust in an employee, and if an employee were to use this knowledge, customer base or other intellectual property, the employer would sustain real harm.

• These agreements often cause more problems than they solve. A large swath of non-compete usage by employees is unjustified and unfair; it is a hindrance to capitalism, and the Alabama Supreme Court has shown way too much willingness to enforce non-compete contracts.

Non-Competition Agreements (non-competes) are like the dark side – an ever present force in the employer-employee relationship with mysterious and perhaps nefarious implications; destructive in nature, but alluring because in some situations they are useful and appropriate. They are mechanisms that can cause destruction like the Death Star – destroying enemy planets and stifling harmful competition with the flick of a switch.

Of course, if you implement a Non-Competition Agreement, you must be ready to handle the full power of such a fully operational battle station and realize that a small band of rebel forces can exploit the weaknesses in the defense system and explode your Death Star (usually this comes in the form of expensive and complicated litigation).

Do not resist the power of the dark side.

What is a Non Competition Agreement? Non-Competition Agreements are also referred to as post-employment restraints. At its most basic form, this agreement is wherein the employee agrees that they will not compete against the employer after the employment relation ceases.

Are Non Competition Agreements standard? Yes and no. Non-Competition Agreements have always been controversial because restricting the job choices of a previous employee flies in the face of at-will employment. Many states do not enforce them. Others, like Alabama, have a general rule that they are void as a restraint on trade unless they fall under an exception in limited circumstances. However, they are enforceable.

Why do employers use them? Non-Competition Agreements are often used by employers because they are broad in scope, and they protect and favor the employer. Many employers use them automatically without much reflection because they are simple to use and because they are focused on the interests of the employer over and beyond that of the employee.

Why do employees sign them? They need the job.

I am an employer. I have an employee who does not want to sign a non compete. What should I do? Congratulations. You have an employee who knows how to read and understands his or her rights and is smart enough to be concerned with his or her future. I would give that employee a promotion.

I am an employee. My employer wants me to sign a non compete. I have heard that these are not worth the paper that they are written on, and think I will just sign one. Is it true that they can’t enforce it? No, they are enforceable. There are many ways to invalidate a non-compete, but the cost of litigation to prove a non-compete enforceable can make it prohibitively expensive. They may or may not be enforceable, but you would be foolish to take the risk.

I have been a little tongue and cheek in the last couple of questions. The truth is that there are certain instances when a non-compete is useful. Employers do have a right to protect the business. In certain situations, an employer has invested substantial money in employee training, devoted a good deal of trust in an employee, and if an employee were to use this knowledge, customer base or other intellectual property, the employer would sustain real harm. Limited agreements restraining competition, particularly for well-paid executives who fully understand the implications of the agreements, are often appropriate and fair for both parties.

But these agreements often cause more problems than they solve. First, I believe they are used by employers who have an unfair negotiation position. An employee cannot sign one of these without fear of signaling disloyalty or fear of losing a job. This position is admittedly a value position that I have based on my experience with executives and employees who are required to sign these agreements. Generally, I believe a large swath of non-compete usage by employees is unjustified and unfair; it is a hindrance to capitalism, and the Alabama Supreme Court has shown way too much willingness to enforce non-compete contracts. In particular, the rule that continued employment is sufficient consideration, the haphazard definition of “professional,” and the ability to enforce against non-executives, creates a good deal of latitude for employers to coerce employees to sign these agreements.

When a non-compete covenant is executed after employment commences, the promise of continued employment and payment received represents adequate consideration. Daughtry v. Capital Gas Co., 229 So.2d 480, 483 (Ala. 1969). Employment at will is also adequate consideration for a restrictive covenant. Affiliated Paper Co. v. Hughes, 667 F.Supp. 1436 (N.D. Ala. 1987). Non-compete agreements governing professionals do not fall under the statutory exception contained in § 8-1-1(b) because that subsection only pertains to a “business,” to an “agent, servant, or employee,” or to soliciting old “customers” of a former “employer.” Odess v. Taylor, 211 So.2d 805, 811 (Ala. 1968). Further, § 8-1-1(c) has been interpreted as applying only to nonprofessional partnerships. See Hoppe v. Preferred Risk Mut. Ins. Co., 470 So.2d 1161, 1163 (Ala. 1985).

Because of some of these cases, even forms pulled off of the Internet have a potential for enforcement. Additionally, when it comes to enforcement, if an employer has a mere leg to stand on, they can create an issue that will prohibit an employee from gaining employment in the same field. The risk of litigation is often enough to make a person unmarketable if he or she is seeking employment where the mere possibility of a lawsuit will prevent the hire. While I understand the necessity to enforce contracts, the free market is hampered by these agreements. They prevent the legitimate establishment of new business and hamper the ability of each individual to sell his or her unique talents. They need to be rethought.

My advice to employers is that they need to use non-competes only in limited situations where they truly have a protectable interest.
– The views in this blog reflect my views only.
– Gruntedemployees.com is a well thought out and more prominent blog which has a similar perspective.

Mike Goodrich
Goodrich Law Firm, LLC

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