Post-Employment Agreements Not to Compete: “Those aren’t enforceable, right?”

Brent R. Borg

Author: Brent R. Borg

POST DATE: 1.3.20
Ccha  Labor Employment

This question is a common one we receive from the three types of clients whose interests are affected by these agreements, namely:

1. Employers who want to enforce post-employment obligations against their former employees;

2. Employees who have parted ways with their employers and are uncertain about what they can and cannot do; and

3. Prospective employers interested in hiring applicants subject to a non-compete, but need to know how to structure the applicants’ job duties appropriately.

Below are some FAQs that will help you gain a better understanding of these agreements, regardless of which of the above situations you find yourself in.

What is a non-compete?

A “non-compete” is the common term for an employment agreement that imposes three general types of obligations on an employee for a specified period of time following termination of the employment relationship (usually one or two years). Those obligations are as follows:

  1. Prohibition against disclosing or using confidential information. Just as an employee cannot leave work with the company laptop, so too with other pieces of company property, such as customer lists, pricing/margin strategy, and a variety of other tangible and intangible (i.e., electronic) information. Agreements typically define confidential information very broadly and, unlike the two other common prohibitions, they do not include a time limitation.
  2. Prohibition against competing. These prohibitions are usually defined by a geographic radius, such as “Employee shall not operate or be employed by any competing business within a twenty-mile radius of Employer’s headquarters.”
  3. Prohibition against soliciting. The most common prohibition against soliciting applies to the employer’s customers, particularly if the employee’s job involved substantial customer contact and development, such as a sales rep. Other forms include prohibiting solicitation of other employees of the company to work elsewhere, soliciting suppliers to do business elsewhere, and so on.

    What type of penalties apply for violation of a non-compete?

    The agreement itself often specifies the types of penalties that may apply. Generally speaking there are four categories:

    1. Actual damages. Proof of actual damages is probably the most straightforward example of a penalty. To illustrate, if a former employee violated a non-solicitation provision by poaching a customer, the employer could argue for actual damages in the form of the net profit it might have realized from the customer during the prohibited period had the employee not poached.
    2. Attorney fees. The agreement itself may provide that the former employee has to pay the employer’s attorney fees if the employer ultimately prevails in enforcing a breached employment agreement. These provisions can significantly increase the former employee’s damages exposure.
    3. Liquidated damages. In cases where actual damages are difficult to calculate, the agreement may provide an amount or formula to determine damages, called “liquidated damages.” Generally speaking, a court will enforce a liquidated damages provision so long as it is not considered a penalty, but rather a reasonable attempt to arrive at an otherwise difficult-to-calculate damages assessment.
    4. Injunctive relief. Injunctive relief refers to an order from a court prohibiting a former employee from engaging in certain conduct, typically after there has been a preliminary or final determination that the former employee violated a non-compete obligation. Injunctive relief is limited to cases where a court has determined, among other things, that the employer will suffer “irreparable damage” if the former employer’s breach of the agreement is allowed to continue.

      Non-competes aren’t enforceable, right?

      Unfortunately, the answer to this question is not straightforward and boils down to “it depends.” Nevertheless, the following observations should serve as useful guideposts:

      1. In the employment context, any prohibited period should be two years or less. If the former employee is prohibited from soliciting customers or co-workers for more than two years, there is a chance a court will not enforce it. Note this applies only to employment relationships. In situations where an employee is also an owner or former owner of the company, courts may enforce longer restriction periods.
      2. Geographic restrictions must be reasonably drawn. A geographic restriction should be limited to areas the employee worked, such as a sales territory. For example, if a former employee was assigned a sales territory of all states east of the Mississippi River, but the non-compete purports to prohibit competition throughout the United States, a court may not enforce the agreement if the employee seeks to compete west of the Mississippi River.
      3. The more specific the prohibition on customers, the more likely a court will enforce. This point is potentially valuable to an employer who has several “key” customers that it wants to protect above all else. In those instances, specifying those key customers as off-limits is more likely to be enforced relative to a broader provision prohibiting the former employee from soliciting all customers the former employee came into contact with during the parties’ employment relationship.
      4. “Solicitation” may not cover all types of contact. Courts have construed the term “solicitation” or “solicit” as the former employee reaching out to the customer or former colleague, which in turn means that if a customer or former colleague initiated contact with the former employee, such contact and subsequent dealings may not violate the agreement. To close down this loophole, some agreements prohibit not only solicitation, but also prohibit doing business with the customer or former employee.

        Navigating post-employment agreements not to compete can be tricky and sometimes fraught with peril. Whether you are a former employer, employee, or prospective employer, arming yourself with the above general rules of thumb is a good first step toward dispelling uncertainty. Because the enforceability of such agreements is very case-specific and nuanced, it is usually a good idea to have experienced employment law counsel review such agreements in light of the specific job and employee at issue to assess the likelihood of the agreement’s enforceability. Contact our CCHA Labor + Employment group to discuss your employment agreement questions.