FAQs ABOUT NONCOMPETITION AGREEMENTS AND NONSOLICITATION AGREEMENTS: AVOIDING THE MANY POTENTIAL PITFALLS

by Employment Law Attorney Leslie Lockard
The Law Office of Leslie Lockard, P.C.
Norwood Corporate Center
1500 Providence Highway, Suite 33
Norwood, MA 02062
(781) 551-0800
Llockard@leslielockard.com
www.leslielockard.com

Noncompetition agreements and nonsolicitation agreements need to be carefully considered and drafted by employers in order to avoid a number of potential pitfalls which could result in expensive litigation and loss of competitive advantage.

NONCOMPETITION AND NONSOLICITATION AGREEMENTS

A noncompetition agreement is an agreement requiring an employee not to engage in business competitive with his employer during the term of his employment and/or for a certain period of time after his employment ends. Noncompetition agreements are exceptions to the general rule that courts will enforce most agreements that people make, according to their terms, even if it seems that the terms were ill-advised.

In deciding whether to enforce noncompetition agreements, courts generally weigh the interest in protecting an employer from loss of good will or from unfair competition against the strong interests in protecting an employee’s right to earn a living at his chosen profession and in fostering free competition. If the employer’s noncompetition agreement appears more broad than necessary to protect the employer’s legally protectable interest, the Court may enforce the agreement only in part or may decline to enforce the agreement at all. It is therefore important to give careful consideration to what types of employees you will ask to enter such a agreements and what the terms of the agreements should be.

A nonsolicitation agreement is a narrower form of noncompetition agreement which precludes an employee from soliciting business from company customers or clients for a certain period of time after the employee goes to work for himself or another company. Nonsolicitation agreements have generally been treated by courts similarly to noncompetition agreements, although, given their narrower scope, they are generally more likely to be enforced as written.

Another type of nonsolicitation agreement requires the employee not to solicit the employer’s employees to work for him or for the employee’s new employer during, and/or for a specified time period after, his employment. Our highest Courts have not yet ruled on whether such clauses are enforceable but our lowest Courts have on several occasions assumed they are, enforcing clauses of up to two years duration.

I. PRELIMINARY CONSIDERATIONS IN DECIDING WHETHER TO REQUIRE EMPLOYEES TO ENTER NONCOMPETITION AGREEMENTS

1. Does your company have an interest which is protectable by a noncompetition agreement?

An employee is permitted to use in future employment general skill and knowledge acquired during the course of employment. However, Massachusetts courts have deemed an employee’s access to trade secrets and confidential business information, and the employer’s good will, as legitimate bases for noncompetition agreements. An agreement which seeks merely to protect an employer from competition, when one of these categories is not impacted, is generally unlikely to be enforced.

• Trade Secrets: The Massachusetts Supreme Judicial Court has defined trade secrets as “any compilation of information which is used in one’s business and which gives the business an opportunity to obtain an advantage over competitors who do not know how to use it”. A trade secret more simply is information which is not publicly known, the use of which gives its owner a competitive advantage. A Massachusetts statute which imposes criminal liability for trade secret theft defines trade secrets in more detail as “anything tangible or intangible or electronically kept or stored, which constitutes, represents, evidences, or records a secret scientific, technical, merchandizing, production or management information, design, process, procedure, formula, invention or improvement.”

• Confidential Business Information: “Confidential business information” includes specific business plans, business methods, financial information, information about product pricing and profit margins, customer lists, contact information for customers and customer leads, information about company vendors, contract bid and sales proposal information, contract terms, marketing plans and information about customers’ particular needs.

• The extent to which the information is known to people outside the company.

• The extent to which the information is known inside the company.

• Whether the employer has taken reasonable measures to protect the confidentiality of the information.

• The value of the information to the employer.

• The amount of time or money which has been devoted to developing the information.

• How difficult it would be for the information to be acquired or duplicated by competitors.
  Goodwill: Employer goodwill has been defined as the employer’s positive reputation in the eyes of its customers or potential customers. A business may have protectable goodwill if its business depends on repeat business with existing customers and/or referrals to potential customers. An employee may be in a position to appropriate his former employer’s goodwill if his close association with the employer’s customers could lead the customers to associate the employer’s products or services with the employee rather than the employer. Salespeople, insurance agents, financial advisors and stockbrokers are examples of such employees. Goodwill may include the name, location and relationship with customers that tend to enable a business to retain its patronage. In some situations, courts have found that some of the goodwill in question belongs to the employee and not to the employer alone.

It is generally not a good idea to have every company employee sign a noncompetition agreement, even if the employee is not one whose work for another employer would adversely impact any interest protectable by a non-compete agreement. Requiring such agreements from employees who do not have access to protectable information tends to undercut a business’ ability to enforce its agreements with employees who do have such information.

3. For how long should a noncompetition agreement preclude employees from competing?

It is advisable to preclude competition for only as long as is necessary to protect the employer’s legally protectable interest. If an overly long post-employment noncompetition period is specified in the agreement, a court may either decrease the time period, or if it appears overly unreasonable, the Court may simply refuse to enforce the agreement at all. A number of courts have enforced noncompetition restrictions up to two years post-employment, and some even longer. However, there seems to be a current trend towards considering such agreements reasonable for only one year.

4. To how wide a geographical scope should the noncompetition agreement apply?

For the same reasons set forth immediately above, it is advisable to limit the geographical scope to only what it is necessary to protect the employer’s legitimately protectable interest. For example, a nationwide scope is unlikely to be enforced unless the employee truly had nationwide duties. In addition, a scope outside the range in which the employer does business is unlikely to be enforced.

5. When should noncompetition agreements be entered with employees?

The best time to enter a noncompetition agreement is at the time the employee is hired. It is also best to let the employee know in an offer letter, on the employment application or in some other written form before the employee accepts the position that, as a condition of hire, he will be required to enter such an agreement. A copy of the agreement should also be provided prior to hire. The employee may be in a stronger position in seeking to avoid the agreement if he can argue that the noncompetition agreement was imposed on him after he had already accepted the position, and he had already resigned his position with his former employer. Like any other contract, noncompetition agreements need to be supported by “consideration”, that is, the employer must be able demonstrate that the employee received something of value in exchange for entering the agreement. If the employee enters a noncompetition agreement at the time of hire, most courts will consider that the employee being hired is a valid exchange for the noncompetition agreement. It is wise to have the employee sign the agreement on the day he begins employment, or before that day. If you wait a few weeks after the employee is hired, for example, you could not be sure that the agreements would be enforced unless you give the employee something additional of value in exchange for the agreement.

If you decide after an employee is hired that you want him to agree to a noncompetition agreement, the wisest course is to give him in exchange for the agreement something of benefit to which he would not otherwise have been entitled, such as a bonus, a promotion, a raise, stock options, or a promise of severance pay or other benefits. Although there is not a definite rule requiring this under Massachusetts law, a number of lower court judges in considering whether to enforce noncompetition agreements have imposed such a requirement. Failing to provide in exchange something of benefit renders the agreement vulnerable to nonenforcement.

6. Would your noncompetition agreement be deemed by a court to violate the public interest?

A noncompetition agreement will not be enforced if it is deemed to violate the public interest. For example, there are certain categories of employees as to whom noncompetition agreements are not enforceable. By statute, noncompetition agreements cannot be imposed on doctors. Such agreements also cannot be applied to nurses. In addition, such agreements cannot be applied to attorneys because of the strong interest in allowing people to be represented by the attorneys of their choice. The latter argument has also sometimes been applied to stockbrokers.

II. DRAFTING OF THE NONCOMPETITION AGREEMENT

1. Because noncompetition agreements are so closely scrutinized by courts, it is important that your company’s agreement be well drafted, and based on a good understanding of your company’s individual circumstances and the current law and trends in relation to judicial enforcement (or nonenforcement) of such agreements. It is wise to invest in the assistance of an employment attorney rather than having non-attorneys draw up the agreement or basing it on a sample used by another company.

2. If you seek to protect trade secrets or confidential business information, make clear in the agreement the types of information that you consider confidential and not to be used during the agreed upon noncompetition period.

3. It is often advisable to include a provision in the agreement stating that if the employee breaches the agreement, and the employer seeks legal action to enforce the agreement, the employee will be required to pay the employer’s attorney’s fees and costs. Such a provision may give the employer valuable bargaining power in seeking to persuade the employee and his new employer to comply with the agreement.

4. It is often advisable to include a provision stating that the employee acknowledges that monetary damages would not provide an adequate remedy to the employer if the employee breaches the agreement, and therefore the employee agrees that the employer can obtain an injunction precluding him from violating the agreement. (Such a provision will not guarantee that the Court will grant an injunction, but it may well be a factor counted in favor of granting an injunction.)

5. Consider what state’s law you want to apply. If your business is done solely in Massachusetts, you will probably want the agreement to state that it will be governed by the laws of Massachusetts. If your company also does business in other states, your attorney will need to consider the law of those states. Some of them are less favorable in their enforcement of noncompetition agreements than are the courts of Massachusetts. For example, noncompetition agreements are unlawful and unenforceable in California. If you have an employee who does some work in California, it may well be helpful to state in the agreement that Massachusetts law will apply to the agreement. (However, particularly if the employment relationship is more centered in another state than in Massachusetts, the Massachusetts choice law provision in the agreement may not be enforced.)

6. For the reasons set forth more fully directly below at paragraph 1, it may be advisable to state in the agreement that the employee agrees that the agreement will remain in effect throughout his employment with the company, during the course of all positions he may hold in the company in the future and irrespective of any changes in the terms and conditions of his employment, and any types of breaks in his service that there may be. We don’t know for sure that Courts will enforce such a clause but it seems reasonable to expect that they will. For the same reason it is probably best not to specify in the noncompetition agreement what the employee’s position is.

7. If there is any possibility that you may wish to sell your business in the future, it is probably advisable to include a provision permitting the company to assign its rights to an acquirer, so that the acquiring company can enforce the company’s noncompetition agreements.

III. HOW TO PROTECT NONCOMPETITION AGREEMENTS AFTER THEY ARE ENTERED

1. It is important to keep track of all of your employees who are subject to noncompetition agreements. Although the law is not completely clear on this point, an increasing number of judges are refusing to enforce noncompetition agreements if the employee’s job duties have undergone a substantial change after the agreement was signed: for example, if the employee was transferred to another division, or given a new position or a promotion. When a material change in such an employee’s duties occurs, the employer should have the employee sign a new noncompetition agreement, providing the employee with some benefit in exchange for signing, such as a raise, a bonus or something else of benefit to which the employee was not previously entitled. If the change in duties is a promotion, the promotion itself can be described in the agreement as the exchange given for the agreement. Alternatively, the employer could have the employee sign an acknowledgment reflecting that the previously entered noncompetition agreement remains in effect after the employee assumes his new duties.

2. Be careful that employees subject to noncompetition agreements are not given subsequent agreements such as employment contracts or stock option contracts or severance agreements which contain language reflecting that the new agreement supersedes all previous agreements. If such a provision is to be included in the new agreement, specific language should be included reflecting that the noncompetition agreement is an exception, and remains in the effect.

3. In order for your noncompetition agreements to be enforceable, it is critical that you make reasonable efforts to keep confidential any trade secrets or confidential business information which are subject to the agreement. If the company seeks an injunction to prevent an ex-employee from using confidential company information for the benefit of a new employer, the company’s confidentially argument will be greatly undercut if the allegedly confidential information appears on the company’s website or in promotional materials or the company’s annual report. The argument will further be undercut if all company employees have easy access to the information. Such information should be provided only to company employees with a need to know. Reasonable efforts should be taken to maintain confidentially such as limiting distribution of memoranda referring to such information, and requiring a password to access such information on the company computer system. It also may be advisable to periodically remind employees of their confidentiality obligations, such as by circulating a reminder memo once a year.

4. The location and use of any information sought to be kept confidential, such as sales or training manuals or other materials discussing other confidential company plans and processes should be monitored.

5. When new employees join the company who should be subject to noncompetition agreements, be sure that these employees sign such agreements at the time of hire. If a number of employees who should be subject to these agreements are not, this will undercut the employer’s argument that it has protectable confidential information which an ex-employee should not be able to use in his new employment.

6. Employees subject to a noncompetition agreement, at the time their employment ends, should be subjected to an exit interview. Ask the employee to tell you where he is going to work and to describe his new position. Show the employee a copy of the noncompetition agreement he signed and remind him of the importance of his compliance with the agreement in his new employment. Seek assurance that he will comply. You may want to ask the employee if he has any questions about how to comply with the agreement or about whether anything he plans to do for the new employer could conflict with the agreement.

7. Make sure that departing employees return all of the company’s property including copies of confidential information and all materials, such as passkeys which give them access to confidential company information.

8. Before you hire the types of employees who possibly may be subject to a noncompetition agreement/nonsolicitation agreement with a previous employer, ask whether any such agreements exist, and, if not, have the employee sign an acknowledgment that no such agreements exist. If you hire employees to do work which would conflict with agreements with previous employers, your company may be drawn into litigation. In addition, if you seek to enforce your own noncompetition agreements, that fact that you have hired others in violation of their agreements with their previous employers could be counted against you. Your former employee may be able to successfully argue that your noncompetition agreement with him should not be enforced because you do not have “clean hands”.

9. If you receive information which reflects that a former employee is breaching a noncompetition agreement with your company, you probably need to take action to enforce the agreement. If you fail to do so in some cases, and seek to do so in another case, your failure to enforce the agreement in other cases may be used as evidence that you have not taken reasonable steps to protect this information in the past. This is another reason why it is important to think carefully about which employees you want to make subject to these agreements, and not apply them to employees as to whom you would not want to invest in legal action in the event of a breach.

IV. IF YOU BECOME AWARE OF A BREACH, OR A POTENTIAL BREACH, OF A NONCOMPETITION AGREEMENT

1. If you become aware of a breach, or a potential breach, of a noncompetition agreement you should act immediately. Provide the information you have to your employment law attorney who will advise you what further steps to take. It is often critical in these cases to seek an injunction promptly. First, if you fail to do so, the harm you are seeking to prevent may already have occurred. In addition, if you do not seek legal action immediately, the Court from whom you do finally seek action may well question why you took so long, if the good will or confidential information is really as critical as you claim.

2. Once you suspect that a breach is occurring, it would be advisable to have your IT person check the employee’s computer records to see if there is any evidence that the employee took company information with him, such as downloading large amounts of information, or sending information to himself at his home email address.

3. If you seek an injunction to enforce a noncompetition agreement, it will be important to gather as much evidence as you can, including as much information as you can based on personal knowledge and written evidence.

4. It may be advisable to send a “cease and desist” letter, attaching a copy of the noncompetition agreement, to both the employee and the new employer. It is possible that the employer will fire the employee if it fears becoming embroiled in litigation. You also may be able to negotiate an agreement with the employee and the new employer which will avoid the need for litigation. In some circumstances, you may wish to increase your bargaining power by filing a complaint and motion for an injunction in court, but then not serving it on the other side immediately so that the court proceedings don’t immediately go forward, but the employee and the new employer see that litigation will go forward unless an agreement is reached with you.

5. If you believe that trade secrets or confidential information have been misappropriated, it is possible to file your complaint and move for a temporary restraining order and ask for expedited discovery to verify and substantiate your suspicions.

6. Although it is critical to act rapidly in such cases, you do need to have a good faith basis for your suit. One court ordered an employer to pay treble damages and attorney’s fees to a former employee when it found that the noncompetition suit brought by the employer was completely baseless, and constituted an improper attempt to intimidate the departed employee.

THIS MEMORANDUM IS FOR GENERAL INFORMATION ONLY, AND IS NOT INTENDED TO PROVIDE LEGAL ADVICE AS TO ANY PARTICULAR SITUATION. EMPLOYMENT LAWS ARE CONSTANTLY SUBJECT TO CHANGE. QUESTIONS ABOUT PARTICULAR SITUATIONS SHOULD BE DIRECTED TO A KNOWLEDGEABLE EMPLOYMENT ATTORNEY. CONTACT ME

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