Friday, September 5, 2008

Inside Recruitment & Talent Development

Noncompete agreements that don’t mean what they say

With the rise in importance of intellectual property and the associated threat to such property as a result of an increasingly mobile workforce, noncompete agreements have become a standard part of employment agreements. Like a prenuptial agreement, noncompetes address what happens at the breakup of a relationship while the relationship is still good.

Typically, noncompete agreements purport to prohibit an employee from going to work for a competitor. While such agreements are generally enforceable like any other contract, they frequently are not enforced to the full extent provided, and, if you are defending against a noncompete agreement, certain steps can be taken to decrease the odds of their full enforcement.

The law in most states is clear:  Noncompete agreements will be enforced, but only to the extent reasonably necessary to protect the former employer’s legitimate business interests, typically identified as the company’s trade secrets, confidential information, goodwill and, sometimes, special skills. On its face, a noncompete agreement that says that the departing employee may not go to a competitor may seem quite reasonable and, therefore, enforceable. That is not always so. The language of the agreement is only the starting point. The nature of the new position is critical, as is the conduct of the employee and new employer in establishing the new relationship.

Compare two scenarios. First, a long-term, successful salesperson who leaves her company goes to work for a direct competitor as its director of marketing. Second, the same salesperson, instead of going to the competitor as its director of marketing, joins the new employer as its director of sales.

As a long-term, successful salesperson, the employee presumably has substantial goodwill of the former employer and may have had access to confidential information and trade secrets. Given that the employee has left to join a direct competitor, the former employer’s legitimate business interests are unquestionably implicated by the move in both scenarios. Accordingly, the noncompete agreement would, based on its express terms, prohibit the new employment. 

The analysis is not, however, that superficial, and how the new employer handles the hiring process in each of these scenarios can make the difference between whether it is permitted to retain the employee in the face of the noncompete agreement or whether it must terminate the relationship. In the first scenario, the employee, as director of marketing, is not likely to use the confidential information of her former employer, nor is her new position one that would draw on the former employer’s goodwill. Accordingly, enforcement of the noncompete agreement under these circumstances seems unnecessary to protect the former employer’s legitimate business interests. 

In the second scenario, however, the director of sales position is more like the employee’s role with her former employer, and therefore the employment will be much more difficult to justify. For the employer to be permitted to proceed with the employment, it will need to convince a court that it can simultaneously employ the new employee and protect the legitimate business interests of the former employer. 

To maximize the possibility of persuading a court that these dual, seemingly incompatible goals can in fact be harmonized, the employee and new employer should take active steps to disclose (i.e., do not mislead or even be coy with the former employer about the new job), describe (i.e., the employee and new employer should be clear about what the new role is and how it protects the former employer’s legitimate business interests), and document their relationship before the employment begins. It bears mention that, because the enforceability of a noncompete agreement is so fact-intensive, not all three steps are advisable in all circumstances, but they should always at least be considered.

The most important guiding principle to remember is that noncompete agreements are as much about the equities as they are about the language of the restrictions. If a court believes that the former employee and new employer are genuinely trying — and able — to protect the former employer’s legitimate business interests, the employee is far more likely to be able to work for a competitor than would otherwise be the case.

Russell Beck is a litigation partner and certified mediator with the Boston office of Foley & Lardner LLP. He can be reached at rbeck@foley.com or 617-342-4031.