There are several tactics for dealing with non-compete agreements including ignoring the agreement and hoping for the best, negotiating with the employer, and attacking the validity of the agreement in the courts.
This article by
TELG principal Tom Harrington and TELG managing principal R. Scott Oswald was published by Westlaw Journal Government Contract on August 18, 2014.
The Best Defense is a Good Offense – Invalidating Non-Competition Agreements when Departing from a Company
It is difficult to describe the combination of emotions employees feel when beginning a new job. They are excited to embark on a journey with their new employer. They are anxious about “fitting in” with their new colleagues. They are hopeful that they made the right choice for their career and are eager to take on new challenges. They want to be seen as reliable, confident and intelligent.
Of the personality traits they do not want to exhibit, “confrontational” is likely high on the list. Whether caused by a desire to avoid confrontation early in an employment relationship or through the whirlwind of required paperwork in a new position, employees routinely disadvantage themselves by entering into restrictive noncompete agreements. From the largest government contractors to the smallest boutique firms, the use of noncompete agreements has been increasing for some time. But there are circumstances that permit a departing employee to challenge
the legitimacy of these agreements, even when all the requirements of contract formation have been met.
This commentary provides an overview of some of the basics of non-compete litigation and enforcement. Specifically, it discusses the steps a departing employee can take to preemptively challenge the validity of a noncompete agreement and why an employee may choose to pursue or forgo such a course of action.
While focusing on helping employees and their counsel combat overly restrictive noncompete agreements, this article should also serve as a cautionary tale to employers about drafting and defending their non-compete agreements.
HALLMARKS OF A TRADITIONAL NON-COMPETE AGREEMENT
At the outset, it is important to note that different states follow different rules and standards for non-compete agreements. In California, for example, non-compete agreements are void, subject to only a handful of limited exceptions.
Most states, though, are not nearly as employee-friendly and will examine several factors in determining whether a noncompete agreement is reasonable and enforceable.
Before providing guidance as to whether a departing employee should challenge a non-compete agreement, it is important to first understand the factors a court will look at when determining an agreement’s validity.
Generally, courts examine a non-compete agreement’s duration, geographic scope and breadth of prohibited conduct. In so doing, courts weigh the employer’s legitimate business interests against the restriction on the employee and place the burden on the employer to demonstrate that the restraint is narrowly drawn.
Different courts apply different tests, but these factors – duration, geographic scope and breadth of prohibited conduct – and the employer’s burden of proof, are a consistent starting point to determine when and how to challenge a non-compete agreement.
When analyzing the duration of a noncompete agreement, it cannot be stressed enough that different courts have different standards for determining what is and is not reasonable. Very few have “bright line” rules, but a review of a jurisdiction’s jurisprudence sheds light on how a court is likely to rule. In Virginia, for example, courts routinely uphold three-year non-compete
agreements and have even enforced a five year agreement.
In Florida, state law provides that “a court shall presume reasonable in time any restraint six months or less in duration and shall presume unreasonable in time any restraint more than two years in duration.” But there are some Florida cases in which the employer was able to demonstrate that a three-year restriction was reasonable under the circumstances. Though you must review the case law of the jurisdiction in which you are working as well as any relevant state statutes, a good rule of thumb is that non-compete agreements of a year or less will generally be upheld in terms
of their duration.
One to three years can tip either way, depending on the circumstances and the relationship between duration and other factors. And, generally, courts view as suspect most agreements that extend
beyond three years.
The geographic scope of a non-compete agreement properly ensures that it only reaches prospective employers with whom the original employer actually competes. In other words, “the standard is whether the geographic scope of the restrictive covenant is ‘no greater than fairly required for protection.'”
As an illustration, assume that a small contracting firm, for the past 20 years, has worked exclusively within the state of Arkansas. The company has never ventured into surrounding states or attempted to do business with the federal government. Moreover, there is no evidence to suggest that the firm had any plans to market its services outside of Arkansas.
In this situation, an employer would find it difficult to enforce a non-compete agreement that precluded a former employee from working beyond Arkansas’ boundaries. As articulated by the Arkansas Court of Appeals, “In determining whether the geographic area is reasonable, the trade area of the former employer is viewed. Where a geographic restriction is greater than the
trade area, the restriction is too broad and the covenant not to compete is void.”
Even when the employer articulates the geographic restriction in terms of miles, the same analysis applies. Courts ask whether the restriction is greater than the area in which the employer does business. If it is, this factor weighs in favor of invalidation.
Employees of government contractors, however, face a difficult dilemma. The nature of government contracting often requires the company to submit a large number of proposals to entities across the United States and, in some circumstances, the world.
In addition to looking at the employer’s current customers, the court may also examine prospective customers or the entities with whom the employer was attempting to establish a relationship.
An employer often paints the company as a large national or multi-national player by pointing to the proposals it submitted or the meetings its executives attended. In so doing, it may succeed in expanding the “trade area” and, consequently, the reasonableness of the non-compete agreement’s geographical scope.
Breadth of prohibited activity
Courts in all states are reluctant to enforce non-compete agreements that are so broad that they preclude former employees from accepting any position with the employer’s competitors.
As a guiding principle, one should examine the contract language and ask a simple question: Would this agreement, on its face, prevent a janitor from working as a physician for a prospective employer?
If the answer is “yes,” a court will likely find the agreement overly broad and unduly burdensome on the employee’s ability to earn a living.
A recent example of this principle involves a pest inspector working in Virginia. Upon beginning work in January 2009, the employee signed an agreement that, in relevant part, provided:
The employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite
control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever.
The court found this language repugnant to public policy and required the employer to prove it had a legitimate business interest in a sweeping prohibition that would completely bar the plaintiff from working in the pest control industry in any capacity.
As the court noted, “[The non-compete agreement] bars him from engaging even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary.”
The court could not allow such a broad restriction and invalidated the agreement. The analysis applies in a similar fashion to the government contracting industry.
Interplay among the factors
Despite the fact that we have discussed each factor separately, they do not stand or fall on their own. Rather, courts examine the relationship among the factors to determine
whether the non-compete agreement, as a whole, is narrowly tailored or unduly burdensome on an employee’s ability to earn a living.
As a North Carolina court observed, “Although either the time or the territory restriction, standing alone, may be reasonable, the combined effect of the two may be unreasonable. A longer period of time is acceptable where the geographic restriction is relatively small, and vice versa.”
Similarly, the Missouri Court of Appeals concluded that, even where a geographic restriction of 50 miles has previously been deemed reasonable, “the case law clearly requires that such restrictions must be viewed under the specific circumstances of each case.”
CHALLENGING A NON-COMPETE AGREEMENT
With a basic understanding of the factors a court will examine, the question becomes if and how an employee should challenge an agreement.
Dealing with the “if,” an employee (or the employee’s counsel) should examine the agreement’s specific language with an eye toward duration, geographic scope and breadth of restriction.
If any of these factors appear to unreasonably prohibit the employee’s right to earn a living, a challenge may be advisable. “How” to deal with non-compete agreements is a more nuanced question. There are three basic approaches for an employee subject to a non-compete who wants to pursue employment that may violate the agreement.
Ignore the agreement and hope for the best
Employees could ignore the non-compete agreement and work for any new employer they choose. On one hand, the employees avoid the costs associated with bringing an action for declaratory judgment (discussed below), but the obvious down side is that they open themselves up to potential liability.
It is not uncommon for aggrieved employers to file multi-count complaints against former employees, with allegations ranging from simple breach of contract, misappropriation,breach of fiduciary duty and everything in between.
While going this route is an option, the potential exposure for the employee makes it ill-advised in all but the most limited of circumstances.
Negotiate with the former employer
Employers have a strong interest in enforcing non-compete agreements between themselves and former employees. From a financial perspective, they do not want their competitors to benefit from the training and contacts that the employee developed on their dime.
From a practical perspective, they do not want current employees to think they can leave whenever they want without any consequences. From a legal perspective, when a company routinely fails to take legal action to enforce their non-compete agreements, a court may invalidate subsequent non-compete agreements that the company does challenge.
That being said, most employers dislike costly and time-consuming litigation. When a departing employee maintains a good relationship with his soon-to-be former employer, there are circumstances under which renegotiating the agreement may be possible.
For example, when an employee is laid-off or terminated, he is often asked to sign a release of claims agreement against the company in exchange for a specified severance amount. This provides an opportunity for the employee (or employee’s counsel) to negotiate the non-compete.
Most states will not absolve the employee of his duties to refrain from competition even when the company decided to terminate the employment relationship.
In this same vein, the employee will want to demonstrate the extent to which the noncompete agreement is unduly burdensome, and make it clear that the court would find it unenforceable.
In states that do not permit blue-penciling or reformation, there is an added incentive for the employer to negotiate a more reasonable agreement. In such jurisdictions, an employer who refuses to negotiate what could be construed as an unreasonable term risks having the entire agreement invalidated.
File a declaratory judgment action
If negotiations break down or are clearly futile, the departing employee should strongly consider filing for a declaratory judgment in which the court invalidates the non-compete agreement. An obvious benefit to seeking a declaratory judgment is the certainty it affords a departing employee who is pursuing new job opportunities.
In a declaratory judgment action, the court determines whether the agreement is valid and enforceable. If the jurisdiction allows blue-penciling or reformation, the court may pare down the restrictions. Either way, the employee knows exactly what he can and cannot do in his new job search.
In addition to the certainty afforded by such an action, seeking a declaratory judgment has the added benefit of minimizing the employee’s legal costs and potential damages. To the former point, agreements that are unquestionably overreaching may be settled with a brief hearing. As to the latter, employees who bring a declaratory judgment action are likely not yet in breach of their noncompete agreements and have therefore not exposed themselves to liability.
Potential plaintiffs also need to be aware of “ripeness” as an issue. For a tribunal to hear a case, the plaintiff’s threatened injury must be ripe in other words, sufficiently imminent to warrant judicial action.
To establish ripeness, a plaintiff must demonstrate both the fitness of the issues for judicial decision and the “hardship to the parties of withholding court consideration. This ripeness inquiry can be satisfied in a number of ways, but the best approach is for an employee to come to court with a job offer in hand and a letter from the former employer indicating its intent to pursue
litigation should the employee accept the position. This is the textbook situation in which an employee’s injury is ripe and an action may be brought. Though initiating litigation can initially
put the former employer on the defensive, a would-be plaintiff must evaluate the likelihood of the employer then asserting a counterclaim.
“Poking the dragon” with a declaratory judgment action can transform what could have been an amicable and straightforward negotiation into costly, complex and time consuming
litigation. This is why the best course of action is often to try to negotiate with the former employer before filing for a declaratory judgment.
NON-COMPETE AGREEMENTS IN GOVERNMENT CONTRACTING
The government contracting industry presents several unique characteristics compared with more traditional, private sector non-compete litigation. As previously discussed, the bidding and proposal process could allow a former employer to significantly broaden the “trade area” and adopt an expansive geographic scope.
Employees may counter this by demonstrating that the company is not, in fact, omnipresent throughout the United States and limits its product and service offerings to a well-defined geographical area.
The employee may show that the former employer only has offices in one city or region, that it has never actually performed any work in the identified regions, that it does not have the infrastructure for expansion, or any other information that could lead the court to conclude that the geographical restriction is based more on wishful thinking than economic reality.
With respect to duration, a case can be made that the rapidly changing nature of information technology demands a shorter non-compete agreement duration within the government IT sector.
One could argue that requiring an employee to “sit on the sidelines” for two years while technology evolves will place an extreme burden on his ability to re-enter the workforce at the conclusion of the non-compete.
Although only touched on briefly here, it must be noted that courts will invalidate an agreement that is contrary to public policy. While courts generally disfavor restraints on trade, the public policy rule is most commonly invoked when a medical clinic seeks to bar a former physician from practicing because doing so harms the community as a whole.
A similar argument could be made in the context of federal contracting. Imagine a large Department of Defense program is up for a new contract award and the incumbent loses. The entirety of the incumbent’s staff, however, are under noncompetes that prevent them from working with the successor company. It potentially undermines vital national security interests when hundreds of people with unique and specialized knowledge are no longer permitted to support the program.
Non-compete litigation provides opportunities for a lawyer to be creative. There are few bright-line rules and the results rely almost entirely upon a party’s ability to show how a given agreement is or is not reasonable under the circumstances.
1 See, e.g., Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 945 (Cal. 2008) (stating, “Today in California, covenants not to compete are void, subject to several exceptions discussed briefly
below.”); see also Cal. Bus. & Prof. Code § 16600(West).
2 See, e.g., Whelan Sec. Co. v. Kennebrew, 379 S.W.3d 835, 841 (Mo. 2012).
3 See Omniplex World Servs. Corp. v. U.S. Investigations Servs., 270 Va. 246, 249 (Va. 2005).
4 But see, Whelan, 379 S.W.3d at 845-46 (affirming that a one-year restriction is per se reasonable under state law).
5 Blue Ridge Anesthesia v. Gidick, 389 S.E.2d 467 (Va. 1990).
6 Alan J. Zuccari Inc. v. Adams, 42 Va. Cir. 132 (Va. Cir. Ct. Apr. 10, 1997) (finding a five-year restriction reasonable where the employee “had no experience in the industry before working for
[the former employer]”).
7 Fla. Stat. Ann. § 542.335 (West).
8 Avalon Legal Info. Servs. v. Keating, 110 So. 3d 75, 82 (Fla. 5th Dist. Ct. App. 2013).
9 Systematic Bus. Servs. v. Bratten, 162 S.W.3d 41, 50 (Mo. Ct. App. 2005).
10 Jaraki v. Cardiology Assocs. of Ne. Ark.., 75 Ark. App. 198, 207 (Ark. Ct. App., Div. I 2001).
11 Home Paramount Pest Control Cos. v. Shaffer, 282 Va. 412 (Va. 2011).
12 Id. at 414.
13 Farr Assocs. v. Baskin, 530 S.E.2d 878, 881
(N.C. Ct. App. 2000).
14 Payroll Advance Inc. v. Yates, 270 S.W.3d 428,
435 (Mo. Ct. App. 2008).
15 Reg’l Rail Reorganization Act Cases, 419 U.S.
102, 140 (1974).
16 Abbott Labs. v. Gardner, 387 U.S. 136, 149
17 See, e.g., Murfreesboro Med. Clinic v. Udom,
166 S.W.3d 674, 677 (Tenn. 2005).