Secrets of Enforcing Noncompetition Agreements

One of the biggest divides between employers and their lawyers seems to revolve around the usefulness, value, and enforceability of non-compete agreements.  Although there has been some pressure in the courts and in the Massachusetts state legislature to limit them, employee noncompetition agreements (also called “restrictive covenants” or “non-competes”) generally are enforceable in Massachusetts to the extent that they are: (1) necessary to protect the employer’s legitimate business interests; (2) reasonably limited in time and space; and (3) supported by consideration.  Note that they may not be used to limit competition generally, but they may be used to give the employer time to re-establish its goodwill with customers that the departed employee has been serving, etc.

The darker secret about non-competes however, is that they may fall away as the employee becomes more valuable and is promoted. Courts have said: “Each time an employee’s employment relationship with the employer changes materially, … a new restrictive covenant must be signed.”  This sentence might well strike terror into an employer’s heart – for two reasons:

  1. It is difficult enough to induce a new employee to sign an agreement by which he or she is forbidden from treading on the employer’s business and/or customers after departure – but asking a “loyal” employee to do so for the second time on the eve of a promotion may seem doubly distasteful to both parties
  2. There are likely thousands of non-competes in companies’ files that have not been updated or re-signed for years despite many position shifts.

 

In our view – despite the provocative language, these cases simply reflect the application of a traditional analysis of one contract being terminated and replaced by another (oral) agreement without incorporating the non-compete terms. The difficulty is deciding what type of promotion or job shift will be considered a termination of the original deal.  In Massachusetts cases, these factors differ widely:  On one occasion, the employer tried to enforce a non-compete that had been signed before the employee was fired and then later rehired; in another it was sufficient that a salesman, whose contract specified his area and rate of pay, was given a new area, rate of pay and title.  In another, where the employer repeatedly tried to get the promoted employee to sign a new non-compete agreement, the court concluded that the parties must have believed that they were creating a new contract, so it treated them accordingly.

It is clear that these cases provide an attractive route for employees – and their lawyers – looking to avoid the restrictions of otherwise valid non-competes.  There are approaches available to try blocking this escape, including the following:

A. FOR NEW EMPLOYEES:

  1. Any letter or contract establishing the non-compete should state explicitly that it is applicable for the entire term of the employee’s employment – regardless of promotions, changes in title or compensation, or other intervening events as long as the employee continues to have access to the company’s protected information.
  2. The non-compete should be executed separately from any employment agreement;
  3. The non-compete should state explicitly that upon any change in position, regardless of promotions, changes in title or compensation or other intervening events, the employee will re-execute and acknowledge the continuing validity of the non-compete at the employer’s request.

 

B.   FOR CURRENT, CONTINUING EMPLOYEES:

  1. Upon any promotion or increase in compensation, notify the employee in writing of those changes and recite that, except as amended by the language of the letter, all of the terms of the previous agreement remain effective, including the non-compete (if any)
  2. Upon a significant position change, require that the employee sign a new agreement with a new non-compete relevant to the new position. If the non-compete is important to you, do not promote or change the employee’s function unless it is signed.
  3. The non-compete should state explicitly that upon any change in position, regardless of promotions, changes in title or compensation or other intervening events, the employee will re-execute and acknowledge the continuing validity of the non-compete at the employer’s request.

 

FOR ALL:
While non-competes are useful for protecting client and customer relationships, they cannot guarantee freedom from competition.  For fuller protection, consider adding confidentiality, trade secret, intellectual property, and assignment of inventions covenants to your employment agreements. To the extent that these effectively reserve or transfer valuable rights to the employer, there will fewer issues of time or geography.

For assistance in drafting and executing an effective non-compete, please contact Prince Lobel partner John F. Bradley, II at jbradley@PrinceLobel.com or 617 456 8076.