Increasing use of restrictive covenants protect firms’ intangible assets but can limit employees’ future career opportunities.
Noncompete agreements operate to restrict an employee from competing against his or her employer in the event that the employee leaves the company. These agreements are used to protect, among other things, customer lists and contacts, trade secrets, and certain intellectual and proprietary assets that an employee may learn about while employed with a company. The use of noncompete agreements for design professionals is increasing. In fact, the United States Chamber of Commerce suggests that employers ask “all engineers and drafting employees engaged in design or engineering work” to sign such agreements.
Along with nonsolicitation agreements (which typically prevent an employee leaving a company from recruiting former co-workers or soliciting a company’s existing customers), noncompete agreements are known as restrictive covenants. For employers, noncompete agreements offer an enforceable method of protecting the intangible assets of a business when an employee leaves. When enforceable, these agreements give employers the right to sue and seek to stop an ex-employee from accepting certain positions that would be considered competitive to the company.
As such, the restrictions contained in a noncompete agreement may significantly limit a former employee’s future employment activities. For instance, they can restrict his or her future ability to work for certain employers, as well as the geographical area of employment. Because a valid noncompete agreement could serve to block one’s future employment, it may be advisable for a potential employee to have an attorney review a noncompete agreement prior to signing it. Often an employee will consult an attorney after the agreement has been signed and he or she is bound by its terms, leaving substantially less room for negotiation and compromise with the employer.
The existence and potential enforcement of a noncompete agreement only comes into play when there is a written contract between an employer and an employee for a set term. Employment arrangements that are either “at will” or pursuant to a verbal agreement do not implicate the issue of noncompete agreements, and an employer who attempts to enforce a putative noncompete agreement under these circumstances will likely not be successful.
The nature of an employment contract thus is a crucial factor in any discussion of noncompete agreements. For instance, if an employee continues to work with a company after the expiration of a written employment contract that contains a noncompete provision, the noncompete provision may become unenforceable when the written contract has been fully performed but the employee continues to work for the company under a verbal understanding.
In spite of a general public policy that views contracts that act as restraints on commerce and trade with skepticism, noncompete agreements often serve as an exception to this general rule and should be viewed as contracts that are susceptible to being fully enforced. Applicable statutes may limit the terms of enforceability of certain agreements based on an analysis of the scope of the agreement and the nature of the business interests sought to be protected. However, while noncompete agreements cannot be used simply as a tool to eliminate competition or merely to protect an employer from competition itself, both employers and employees should assume that signed noncompete agreements will likely be enforceable.
Noncompete agreements are governed by state law. Therefore, while they are generally valid in certain states such as Florida and Texas, they could be found to be an illegal restraint of trade in other states, such as California. In states that permit noncompete agreements, the requirements for what constitutes a permissible, enforceable agreement is often spelled out in a statute. Determination of whether a noncompete agreement is enforceable is typically a fact and circumstantial specific inquiry.
There is some tension in the law between the concepts that a court will not rewrite a contract voluntarily entered into between two parties and that a court may modify a noncompete agreement such that its restrictions on an employee’s subsequent employment are reasonable. Nevertheless, if a noncompete agreement is too broad in scope it can be modified by a court to provide relief that is reasonably necessary to justify the restriction.
In Florida, noncompete agreements are generally enforceable contracts. A noncompete agreement must be reasonable as to the time, area, and line of business and must be signed by the person against whom enforcement is sought (the employee). In New York, a noncompete agreement will be enforced if it is reasonably limited as to time, geographic area, and scope necessary to protect the employer’s interests, not harmful to the public, and not unduly burdensome.
For example, in Florida, a business seeking to enforce a noncompete agreement must establish a legitimate business interest justifying the restriction on its employee and show that the restriction is reasonably necessary to protect the business interest at issue. Examples of legitimate business interests in this context include trade secrets, specialized training, and substantial relationships with specific prospective or existing customers or clients. Note that general knowledge or skills gained merely by working for an employer will likely not be sufficient to constitute specialized training.
The first goal of an employee who is the target of a court action brought by an employer to have a noncompete agreement enforced should be to have the agreement declared unenforceable. Under this set of circumstances, the employee should closely examine whether the employer materially breached the parties’ employment contract.
If the employer breached the contract prior to the employee’s alleged breach of the noncompete agreement, the employee’s obligation to comply with the noncompete agreement may be obviated. The legal reason behind this rule is that an employer who has committed the first material breach of the employment contract thereby allows the employee to treat such breach as a discharge of the employee’s contractual obligation to adhere to the noncompete agreement. The most common material breach defense asserted by an employee who has previously signed a noncompete agreement is the employer’s failure to pay compensation under their contract.
Even if an employee does not succeed in having a noncompete agreement deemed as unenforceable, he or she may still challenge the terms of enforcement. For example, the employee can argue that the noncompete agreement is overbroad as to what types of work the employee is restricted from engaging in, that the geographical scope of the agreement is too wide, or that the timeframe of the agreement is too long. The employee should also require that the court determine whether the agreement meets the requirement that a noncompete agreement protect the employer’s business interest (as defined by the particular state law under which the noncompete agreement is being interpreted).
The same strategy applies to an employee’s defense against an employer’s attempt to obtain an injunction against the employee from violating the terms of the noncompete agreement. An employee should check to make sure that the elements required for an injunction are present—a likelihood of irreparable harm and a substantial likelihood of success on the merits—with the goal of limiting the scope of an injunction as a fallback position (for example, making a distinction between unknown prospective customers and specific customers that existed at the time of the employee’s employment).
In conclusion, the use of noncompete agreements for engineering professionals is on the rise. Because a noncompete agreement can exert a substantial impact on one’s post-employment professional opportunities, a sensible design professional should be aware of the ramifications of signing such an agreement and cognizant of the rights and responsibilities that an enforceable noncompete agreement entails.