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by Daniel L. DeMarco, Vice President and Legal Counsel Increased technology and specialization in the last several years in many professional disciplines has caused many employers to place restrictions on employees who leave their employment for other opportunities with new employers. This is done through the use of what are commonly referred to as Covenants Not to Compete, which are written agreements signed by the employee and employer prior to, or contemporaneously with, the commencement of employment. In the past, employers would normally only require high-level executives in a company to execute these agreements. However, due to increasing skill sophistication in the workforce, and high turnover as a result of a greater demand for skilled workers, employers have been requiring more senior-level employees to enter into these agreements as a condition of employment. Many employees will sign these agreements without understanding the ramifications if they decide to leave their employer for another job. At that point, if the employer believes that the individual leaving intends to use certain trade secrets he or she obtained while employed with the employer; intends to solicit business from customers of the employer in his or her new job; or intends to hire employees from his former employer, litigation can and many times is initiated by the former employer to enforce the restrictions set forth in the agreement. There exist a plethora of legal opinions written by many courts throughout the country in most every state regarding the enforceability of Covenants Not to Compete. These opinions are not always uniform, since many states apply different thresholds as they relate to the general legal standards that most all courts do apply when evaluating the enforceability of these agreements. These standards are summarized as follows:
Protecting Business Interests Protecting business interests of the employer means that an employee can be prohibited from soliciting current customers or potential customers of the employer. Potential customers would normally include those that the former employer has already contacted and is attempted to obtain as a customer. Soliciting other employees from the employer can also be prohibited, but on its face, a former employee has not necessarily violated the agreement if another employee from the former employer voluntarily applies for a position with the former employee's new employer. Finally, using trade secrets of the former employer can also be prohibited. This is probably the most difficult area of enforcement because defining a trade secret that is prohibited from being used by the former employee in his or her new position requires an additional legal analysis, and is beyond the scope of this article. Time and Territory Most courts generally seek to determine how long it will take the former employer to hire and train a replacement for the former employer, as well as how long it will take for the replacement employee to become a productive asset. No clearly defined number of months exists in this context, but courts are generally unwilling to enforce an agreement with a time restriction beyond one year. Most courts generally define the territorial restrictions as the area in which the former employer is engaged in business with other businesses. If the former employer is engaged in business across the country, courts may be hesitant to enforce such a restriction since it is overbroad and may completely prevent a former employee from earning a living. A court may determine the area of the country in which most of the clients of the former employer exist, and limit the territory accordingly. Unduly Restrictive As stated earlier, many companies are now requiring all employees, regardless of their level within the company, to execute Covenants Not to Compete. However, if an employee does not necessarily have access to information such as customer lists, or certain established relationships with clients, courts may be unwilling to enforce restrictions on these types of employees, even thought the new employer may be attempting to compete for the same clients as the former employer. Likewise, there may be certain trade secrets that the employee was never privy to in performing job duties with his or her former employer. In such circumstances, a court may find it unreasonable to prevent the employee from working for a new employer that may have an interest in the former employer's trade secrets. Reasonable Public Policy Courts will balance the public interest in allowing an individual to earn a living in his her trade against the interest in protecting a company's confidential information or trade secrets that an employee has learned or helped develop while employed. Some states have enacted statutes that specifically address the weight to be given to the right of an individual to earn a living versus the protection that should be afforded the trade secrets of a company. In other states without statutes, courts have developed legal standards for such a balance through case law. Regardless of whether statutory law or case law is applied, each case becomes fact specific, and therefore it will be rare that one particular dispute regarding the enforceability of Covenant Not to Compete will be similar to previous ones heard by a court. Accordingly, legal precedent may require some unique legal arguments when applying the law to the facts in dispute. Lawyers skilled in this area of the law should be hired to handle such a dispute. Valuable Consideration Finally, in order for a Covenant Not to Compete to be legally binding on the employee, he or she must have been provided with valuable consideration prior to or contemporaneous with the formal execution of the Covenant. Consideration in the law means that benefits and detriments are being exchanged between the employer and employee. The benefit the employer receives is that an employee will be precluded from working in a particular profession in a defined period of time and territory. In exchange, the employer must provide a benefit to the employee. This can come in the form of an employee's wage or salary when hired. In the event the employer wants an employee to sign a Covenant Not to Compete after the employee is hired, a pay raise or a promotion can serve as valuable consideration that will result in a legally enforceable Covenant. One of the most important things for any employer to remember is to make certain that the employee is informed as soon as possible prior to being hired that he or she will be expected to execute a Covenant Not to Compete as a condition of employment. This will avoid the pitfall of an employee claiming ignorance when he or she leaves the employer, or claiming they were compelled to execute the Covenant Not to Compete after they were hired without valuable consideration.
Daniel L. DeMarco is the Vice-President and General Counsel for The
Hill
Group.
He provides legal counsel in employment, business, and commercial law.
Daniel can be reached at
ddemarco@hillgroupinc.com or 412-343-9393. These materials have been prepared for educational and information purposes only. They are not consulting advice or opinions on any specific matters. Transmission of the information is not intended to create, and receipt does not constitute, a consultant-client relationship between The Hill Group, Inc. and any recipient of this material. Readers should not act upon this information without seeking professional advice. 
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