Are Noncompete Agreements Feasible?
Question: Our business leaders want to require all new employees who begin working with us to sign a noncompete agreement stating that they will not work with the competition for one year after leaving the job. They want to do this because we have been losing a lot of good workers to our competition recently. Is this something that is legally feasible?
Answer: It depends on what state your company is operating in. There is no federal law prohibiting a company from including a one-year noncompete agreement in all new contracts. However, some states either completely ban or limit the applicability of noncompete agreements. Therefore, while a company may include noncompete language in a contract, it may not be enforceable.
Noncompete agreements are an important tool to use to protect business interests. Noncompete clauses prevent former employees from joining a competitor, and typically apply for one to two years. Often, employers include them in contracts to protect trade secrets, customer relationships, goodwill or specialized training. Nonetheless, while there are strong reasons for an employer to include noncompete language in a contract, they are one of the most difficult types of restrictive covenants (agreements that limit activity) to enforce in an employment contract. Generally, in order to be enforceable, a noncompete clause must: 1) be supported by consideration; 2) protect a legitimate business interest; and 3) be reasonable in scope, duration and geography.
In general, states agree on the definition of consideration (money, stocks or offers of employment), and similarly agree that concerns such as protecting trade secrets, customer goodwill or workforce stability qualify as legitimate business interests. Yet, states differ widely on what they consider to be a reasonable noncompete clause, with some states fully banning noncompetes all together. In order for your business leaders to be able to enforce their noncompete clause, it will depend on what state the employee is working in.
To begin with, certain states flatly ban noncompete clauses in contracts. This is most prominently true in California. Cal. Bus. & Prof. Code § 16600 et seq. Montana and North Dakota have similarly banned noncompete clauses. In these states, regardless of the language used in the contract and regardless of the legitimate reasons for needing a noncompete clause, employers cannot enforce the one-year noncompete agreement you asked about.
Outside of these states, it is also important to know if any of your employees are attorneys, because lawyers are generally prohibited from participating in any sort of agreement that restricts a lawyer's right to practice law. Model Rule of Professional Conduct 5.6(a). The rule is designed to protect the free practice of law and the right of clients to choose their own attorneys. See ABA Comm. On Ethics and Prof'l Responsibility, Formal Op. 94-381 (1994). This rule has been adopted in most states. For example, California, Colorado, Connecticut, Delaware, Florida, Illinois, Maryland, Nevada, New York and North Carolina, among other states, have adopted ethical rules substantially similar, or identical to, the language set forth in Model Rule 5.6(a). In addition, Virginia has also determined that a noncompete agreement with in-house counsel is not permitted under its state attorney ethics rules. However, it is important to note that in certain states this rule may not prohibit a noncompete clause that restricts an attorney from working in a non-legal capacity at a competitor. See, e.g., Conn. Bar Ass'n Comm. on Prof. Ethics, Information Op. No. 02-05 (Feb. 26, 2002).
Many states allow noncompete clauses, yet may limit their applicability or their effect. States including New York, New Jersey, Massachusetts and Illinois all allow noncompete clauses, but their applicability is based on courts determining the reasonability of the scope of the agreement. Certain states, such as New York, have a stated policy that they disfavor noncompete clauses. However, courts will enforce the clauses if they are reasonable and necessary. Lucente v. Int'I Bus. Mach. Inc., 310 F. 3d 243, 254 (2d Cir. 2002). In New York, courts typically apply a three-part test to determine the reasonableness of a noncompete provision. A noncompete clause is reasonable if it: (1) is no greater than required for the protection of the legitimate interests of the employer; (2) does not impose undue hardship on the employee; and (3) is not injurious to the public. BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388-99 (1999). Under this test, courts have typically upheld noncompete covenants for a one-year period following termination for a variety of distances. See, e.g., Rifkinson-Mann v. Kasoff, 641 N.Y.S.2d 102, 103 (2d Dep't 1996). Importantly, in New York, even if the employee is ultimately allowed to join a competitor, courts may require the employee to forfeit any benefits (such as pension, earned wages, and/or commissions) if the employee involuntarily resigned or was terminated for cause. See, e.g., Lucente, 310 F. 3d at 254.
Therefore, because of the wide range of state-based approaches to noncompete agreements, one size DOES NOT fit all when it comes to noncompetes, because noncompletes must be carefully and reasonably tailored to fit the specific jobs in question and the specific business needs of the employer. Also, in order to ensure that your noncompete clauses have the best chance of being legally enforceable, employers should consult with an employment non-complete/restrictive covenant specialist who can assist in drafting them, so that they comply with the restrictive covenant laws of the applicable states.
Keisha-Ann G. Gray is a partner in Proskauer's labor and employment department, resident in the firm's New York office. Proskauer Associate Yonatan L. Grossman-Boder, also in the firm's New York office, assisted with this article.