Drafting Noncompetes in a Tough Enforcement Climate

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Drafting Noncompetes in a Tough Enforcement Climate

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Corporate Counsel

Noncompete agreements have taken a beating over the last year. Recent actions by various government agencies and officials expose the perils of the overreaching noncompete agreement and underscore the importance of making sure provisions are carefully drafted and appropriately used. Here are the key highlights:

The Obama White House: Former President Barack Obama’s White House issued several statements critical of the unlimited use of noncompete agreements. It sought to ban noncompetes for the lowest-paid workers, require employers to provide their form noncompete agreements for employee review at the job-offer stage and discourage judges from narrowing overly broad noncompetes. It’s hard to say which way the Trump administration will come out on these questions—while his policies are expected to be company-friendly in the name of job creation, it is possible that he will side with employees in seeking to limit the enforcement of noncompetes, which limit their job choices.

The Treasury Department: Also under President Obama’s watch, the Treasury issued a report warning of the negative impact that noncompetes might have on employee bargaining power and wages, as well as the economy in general.

The National Labor Relations Board: The NLRB issued several decisions in the last two years critical of noncompete agreements. For example, it found that an employer violated the National Labor Relations Act by requiring new employees to sign noncompete and nondisclosure agreements as a condition of employment but failing to provide the union an opportunity to bargain on the issue.

State attorneys general: At the state level, too, noncompete agreements came under attack. Several state attorneys general brought suits against employers last year, challenging their practice of having rank-and-file employees who are unlikely to possess confidential information (e.g., sandwich makers at Jimmy Johns) sign noncompetes.

Statutes restricting the use of noncompetes: Several states passed laws restricting the application and enforcement of noncompete agreements. Oregon and Utah, for example, statutorily limited the duration of noncompetes to two years and one year, respectively. And Illinois banned noncompetes, of any duration, for use with employees making less than $13 per hour.

Steps to Strengthen Noncompetes Against Stricter Standards
Noncompete agreements still will be enforced in most U.S. jurisdictions, provided they are drafted and used in an appropriate manner. (California, Colorado, Montana and North Dakota are among the minority of states prohibiting the enforcement of employee noncompetes.) That is unlikely to change anytime soon. But these clear policy statements suggest that noncompetes may be subject to stricter standards and be viewed with a more discerning eye, even in the states that enforce them.

So it is more important than ever to draft and use noncompetes in a reasonable manner. While the definition of “reasonable” will vary with each employer, its business and a host of other circumstances, these are some possible ways to more narrowly tailor your form noncompete agreement:

  • Noncompete provisions are frequently more enforceable with geographic boundaries and time limits. Those limits should relate specifically to the employee and her performance of duties for the company, e.g., the geographic area in which the employee provided services and/or about which she knows confidential information, and the time it will take to establish a replacement employee in the relevant customer relationships.
  • Limiting employees from working for a competitor with regard to a particular business segment or product line after they leave often stands a better chance of enforcement than a broader prohibition against working for a competitor in any capacity.
  • A prohibition against doing business with certain customers can sometimes take the place of a broader noncompete provision. Reasonable customer-based restrictions also can substitute for a geographic limit in many jurisdictions.    
  • When using a customer-based restriction, consider carefully whether the company’s entire customer base needs to be designated off-limits. It often suffices to bar contact with only those customers with whom the employee had material contact, or about whom she learned confidential information, while performing her company duties.
  • Be careful about attempting to put prospective or former customers off-limits. It often makes sense to limit the universe of restricted customers to those who were company customers within the last six months of employment, and to limit the definition of “prospective customer,” e.g., to those for whom a bid or proposal is outstanding.
  • Consider which categories and groups of employees truly pose a risk of unfair competition. Consult with counsel before requiring low-wage, hourly employees and “bargaining unit” employees to sign noncompetes.
  • Talk with legal counsel knowledgeable about the noncompete law of the state or states in which your employees work to identify any recent state-specific developments that should be taken into account.

This list is not exhaustive; there might be additional limitations to consider in evaluating the contents and usage of a particular noncompete form going forward. And employers will want to consult with counsel before attempting to change any existing noncompete agreements that already have been signed by employees, as well, to ensure that applicable rules regarding contract consideration are followed. Noncompete drafting is increasingly complex and is affected by an evolving array of factual and legal considerations.

Counsel who are experienced in noncompete law can help evaluate form agreements quickly and efficiently and navigate smoothly through what appear to be winds of change in the area of noncompete enforcement.

Linda K. Stevens is co-chair of the Trade Secrets Practice Group at Schiff Hardin LLP.


Reprinted with permission from the Feb. 22, 2017 edition of the Corporate Counsel© 2017 ALM Media Properties, LLC. All rights reserved.

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