There’s a bit of an urban legend that floats around regarding Non-Competes, and it’s that they’re not enforceable. In the majority of states that is simply not the case. They are enforceable, and although there are some restrictions on employee Non-Competes, they can and routinely are enforced throughout Pennsylvania and New Jersey. What I would offer today is 4 suggestions for strategies for employers who want to make their Non-Compete agreements more likely to be enforced in court.
Ed Robson here from Robson & Robson PC. We are a boutique business law firm that is located outside of Philadelphia. I focus my practice on litigation and we routinely represent employers who are seeking to enforce Non-Compete agreements against employees who have left their employ and are now working for competitors.
Before I offer my 4 suggestions, I want to give you a quick review of the law of Non-Competes, at least as it applies in Pennsylvania and New Jersey, but in fact it’s something similar in the majority of states and it’s this: courts disfavor Non-Competes and the reason they disfavor them is because they interfere with a person’s ability to earn a living for their family; economically it’s also not great for society to have a whole group of working age talented people sitting at home because they’re unable to work in their chosen profession because of the Non-Compete. On the other hand, courts recognize that businesses have a legitimate interest in protecting their competitive advantage using Non-Competes. So, what you see in the cases is courts attempting to balance these competing forces: legitimate interest of business in protecting competitive advantage versus an individual’s right to earn a living and the benefits of society of having working age people work in their chosen profession. This balancing is reflected in a variety of ways, and if you know anything about Non-Competes, you know that they have to be reasonable in terms of scope, time, and geographic reach. What those factors are really getting at is how do we balance those competing interests between business and the individual, and so you’ll see that that theme is reflected in all 4 of my suggestions. So, let’s go through the suggestions.
So, the first strategy for improving the enforceability of Non-Competes is to consider which employees get a Non-Compete. When you go to enforce a Non-Compete and you get in front of the judge, ultimately the judge is trying to weigh your legitimate business interests and the employees interests in being able to earn a living, and so you need to be prepared to explain to the judge why a particular employee poses a threat to you and is a risk to your competitive advantage. That can be very hard to do if you are trying to enforce a Non-Compete against a janitor, or an administrative assistant or another low wage employee. So, although there is no bright line rule regarding who gets a Non-Compete and who doesn’t. Some of the things we see that makes a Non-Compete much easier to enforce is when you are trying to enforce a Non-Compete against a Senior Level Executive, somebody who is making more than 6 figures, somebody who has strategic decision making authority at a business, somebody who is pretty to a significant amount of confidential information and strategic information regarding the business’s plans or strategies. Also, people who have a better chance at negotiating their employment agreement. A CEO coming into a company is usually in a much better position to negotiate a Non-Compete than, let’s say, a mid-level manager, and so those types of higher-level employees make it much easier to enforce a Non-Compete agreement. One policy that we’ve seen some clients use that is fairly effective is setting a threshold in the corporate ladder over which employees have to sign a Non-Compete. So, for example for an associate or a senior associate or a manager they don’t have to sign Non-Competes. But when you get to the, you know, Executive Vice President or the Vice President the Director level, whatever that title is, then you have to sign a Non-Compete in conjunction with that promotion. So, we’ve seen that work pretty well for some clients and it’s worth considering.
So, the second strategy for a business that’s attempting to improve the enforceability of Non-Competes is to not wait to sue. And what I mean by that is once you have knowledge that an employee is working for a competitor, you need to do something about that right away. You need to take action and file a lawsuit to prevent that. The longer you wait the more difficult it will be to enforce that Non-Compete and here’s why: Non-Compete litigation is typically resolved at the preliminary injunction stage. You file a complaint and immediately request that the court issue an order to order your former employee to stop working. The standard to get a preliminary injunction is that you must show immediate and irreparable harm. If you are aware that a former employee is working for a competitor and you don’t do anything about it for months, the former employee is going to say to the judge there is no immediate harm. They have been aware of the fact that I was working for a competitor and they haven’t done anything about it for months. That’s not an unpersuasive argument and one that can be easily avoided by simply acting quickly. As soon as you find out that an employee is competing with you or working with a competitor, take action immediately. We’ve had employers come to us and say well I knew he was working there; I knew she was working there for 6 months but I really didn’t think she was going to be particularly effective and so I waited 6 months to do anything and here I am. That hands the employee and the new employer a major defense and there is no reason to do that. Once you know, act right away.
The third strategy for ensuring the enforceability of your Non-Compete is a bit of technical one and it’s this: be sure that your Non-Compete is supported by adequate consideration. What does that mean? It simply means that the employee must get something in exchange for their agreement not to compete. Here’s the typical fact pattern. An employee starts their job as a managing director of whatever. They are working there for several months and HR comes down and realizes that the employee has not signed a Non-Compete. They present the person with a Non-Compete, the say please sign this, person agrees, they move on about their day. The employee did not receive any benefit for that Non-Compete. He didn’t get a raise, he didn’t get a promotion, he didn’t get any benefit for his agreement not to compete. And you say well, but he didn’t get fired. He would have been fired if he didn’t sign a Non-Compete. Courts don’t look at it that way. The employee must get something that they didn’t already have. In my hypothetical, the employee already had a job. So, it’s always important to make sure that employee is getting something. Common examples of things that they can get: an initial job if you had presented the employment agreement to the employee at the offset and said signing this employment agreement is a condition of getting this job, that is certainly appropriate. Getting a promotion where you get a raise, he is moving from director to managing director, he gets a raise of $10/hour or some bump in his salary, that’s generally enough to support a Non-Compete agreement.
One area of consideration that can be a little bit tricky is granting somebody options or phantom stock in exchange for their Non-Compete. There are cases out there where courts have looked at options that are deeply out of the money, or phantom stock that is very speculative and decided that, that is not adequate consideration to support a non-compete because it’s value, if any, is so speculative has to be meaningless. So again, make sure that when you are getting am employee to sign a Non-Compete it is easy to identify what they are getting in exchange for that agreement, and that is something that they didn’t already have before signing the Non-Compete.
So, our fourth strategy for improving the enforceability of Non-Competes is to be aware of what’s known as the worthless employee doctrine. And basically, what the worthless employee doctrine says is that if you are terminating an employee for poor performance, it’s going to be more difficult for you to enforce a Non-Compete against that employee. Again, courts are looking to weigh your legitimate business interests versus the employee’s right to make a living. And so, if you terminated somebody for poor performance, the court is going to sit there and say, under the worthless employee doctrine, if you terminated this person because they were ineffective, how are you going to turn around and say they’re going to be a competitive threat to you? Now, that being said, there is a variety of good reasons for terminating the employee that are not going to implicate the worthless employee doctrine. Certainly, if somebody is already unfairly competing with you, or working for a competitor, you can terminate them on that basis without having to worry about the worthless employee doctrine. If somebody is stealing from you or syphoning business, all of these reasons are viable, they’re obviously good reasons to terminate the employee but are not going to invoke the worthless employee doctrine.
So those are our 4 suggestions for improving the enforceability of Non-Compete. If you like these videos, if you are getting something from them, if you want to hear about a topic that we haven’t covered yet, please drop us an email, my email address is [email protected]