Noncompete Clauses: Craft Them With Care and Agree to Them With Caution
Employer and employee interests can be at odds, particularly in the period of time after an employee leaves a job. The employee naturally takes with him or her to the next position skills and knowledge obtained in the course of previous work. The employer, understandably, tries to keep the data that leaves with the employee from including crucial business information like trade secrets and customer lists.
To this end, it is not uncommon for employers to require as a condition of employment that employees sign covenants not to compete, also known as noncompete agreements, noncompete clauses or simply noncompetes.
A noncompete typically forbids an employee from working for a competitor or starting a competing business for a particular length of time and in a certain geographical area.
These covenants are controlled by state law, and the extent to which they are enforceable varies widely among the states. For example, almost all noncompetes are illegal in California, while in Massachusetts they are alive and well within certain parameters.
In Massachusetts and in most other states, to be valid a noncompete must be:
- Reasonable as to time and place restrictions
- In the public interest
- Needed to protect "legitimate business interests" (trade secrets, confidential information, good will with customers)
- Required in exchange for consideration (the employee must get something of value in return for agreeing to the restriction)
Because these questions require scrutiny of the facts and circumstances of the individual agreement in question, courts often end up analyzing them in detail. Broadly, the more specific and narrow the clause, the more likely it will be found to be valid.
In the May, 2011, case of Aspect Software, Inc. v. Barnett, the U.S. District Court for the District of Massachusetts interpreted Massachusetts law to allow a noncompete that forbade an executive for one year from working elsewhere if he "would be reasonably likely to employ, reveal or otherwise utilize trade secrets," and from contacting the former employer's customers or potential customers. The court felt that it was impossible for the employee not to be influenced by confidential information he knew about his former employer in his work for the competing company and so the covenant not to compete was valid.
In recent years there have been bills unsuccessfully introduced in the Massachusetts legislature to change noncompete law in the state, whether by forbidding them altogether or by limiting their application further. Debate rages in the state about whether noncompetes are good for the business climate - do they fairly protect sensitive company information from exposure to competitors, or do they restrict the healthy flow of talent, and therefore industry growth, between enterprises?
One thing is certain, a noncompete provision should be carefully written with guidance from a commercial law attorney with experience in business litigation. A sloppy clause without compliance with legal standards may be unenforceable. From the other angle, any employee being asked to agree to a noncompete should consult an employment lawyer for advice about whether it is legally reasonable.