Friday, November 14, 2014

Are Your Noncompetes ‘Freaky Good’?

Noncompetition agreements have been a hot topic since the recent news that sandwich maker Jimmy John’s requires low-level employees—including sandwich makers and delivery drivers—to enter into such agreements as a condition of employment.  The Jimmy John’s agreement prohibits employees from working for any business that derives at least 10% of its revenue from sandwich sales and is located within three miles of a Jimmy John’s. The restriction lasts for two years after an employee leaves Jimmy John’s.
 
This agreement has come under intense scrutiny, including from Congress, because it severely restricts Jimmy John’s employees’ employment opportunities, even though the employees pose little or no risk of exposing sensitive or proprietary information or otherwise unfairly competing against their former employer.  With all the negative attention Jimmy John’s is getting, employers should revisit their own use of noncompetition agreements to ensure that such agreements are enforceable, and actually protect their business.
 
Each state has its own laws governing noncompetition agreements, and employers must make certain their agreements conform to applicable laws in the states in which they operate.   As a general rule, agreements should be no more restrictive than is necessary to protect the employer’s legitimate interests.  Noncompetition agreements that are overly broad, or that cannot be justified on the basis of a legitimate business interest, are far less likely to be enforceable than more narrowly-tailored agreements. To improve the likelihood that noncompetition agreements will be enforced, employers should consider the following:
  1. Nature of Employment. If the employee’s job exposes him or her to sensitive, strategic, or proprietary information that could harm the employer if revealed to a competitor, the employee is a good target for a noncompetition agreement.  Such employees generally include high level, highly-compensated employees, salespeople with access to customer lists, and those with access to trade secrets.  By contrast, low-level employees, who are unlikely to have information that could damage the employer if revealed to a competitor (e.g., sandwich makers and delivery drivers), are poor targets for noncompetition agreements.
  2. Duration of Limitation.  As a general rule, agreements that restrict an employee’s ability to work for more than two years will not be enforced.  Generally, employers should strive to restrict an employee’s ability to work for the shortest period necessary to protect their interests.
  3. Scope of Limitation. Noncompetition agreements often restrict an employee’s work either geographically or by the nature of the employee’s duties.  Geographical restrictions are most likely to be upheld if they are limited to locations in which the employer has a verifiable presence. Restrictions on particular duties or types of work are most likely to be enforced if they are narrowly tailored and allow the employee a reasonable chance to make a living.
Courts generally disfavor noncompetition agreements that unreasonably limit an employee’s ability to work.  In some instances, courts will “blue pencil” an overly broad noncompetition agreement, revising its terms to limit the burden placed on the employee. In other instances, however, courts will simply declare the agreement unenforceable, leaving the employer without any protection against harmful competition.  When it comes to noncompetes, it’s often the case that less is more.