Non-Competition agreements might have a dim future

Non-Competition agreements might have a dim future

Greg McCoy | Holland Attorney

Employers commonly require employees to sign “non-competition” agreements. There are various forms of these agreements, but typically they prevent an employee from working in the same industry for a period of time (such as a year), within a certain geographic area, after their employment ends. The agreements, to be enforceable, must be narrowly written to prevent an employee from “unfairly” competing by taking advantage of inside knowledge or hard-earned customer relationships on behalf of a new employer. A less restrictive form of this agreement is known as a “non-solicitation” agreement, which prevents an employee from contacting customers (and sometimes co-workers) after their employment ends, but allows the employee to continue to work in the industry. Non-competition agreements are more important with management employees or those with knowledge of very important confidential information. On the other hand, non-solicitation agreements are more important for employees that that have jobs that involve consistent interactions with customers, where a professional relationship has developed that allows their business to be shifted to the new employer.

Court’s have typically been less willing to enforce non-competition agreements since it prevents someone from earning a living during the non-compete period. Many people only have a skill set within a particular industry and moving out of the area where the former employer does business is typically not a viable option. On the other hand, non-solicitation agreements only require a “hands off” rule with customers for a period of time, and are almost always enforceable in court. In addition to the courts, the federal government, most notably the Federal Trade Commission, has taken notice about how unfair non-competition agreements can be, and that they can violate federal “antitrust” law. As non-competition agreements have become more common, employers have been taking a shot-gun approach and preventing even lower-level employees from leaving to work for another employer in the industry. In fact, Jimmy Johns, the fast food sub chain, required its employees to sign an agreement that not only prevented them working for another sub maker, but all fast food restaurants that made sandwiches within two miles of a Jimmy John’s store. This agreement was ruled to be illegal, but it required the employees to go to court to fight it, which is a risk and expensive step for many employees.

As a result of abuses, and the harm to the economy, the FTC is proposing a new rule that would ban employers from making employees and independent contractors sign non-competition agreements or trying to enforce already existing agreements. The FTC studied this issue and determined that these types of agreements suppress wages and hamper innovation (since employees cannot start their own businesses) since employees can effectively be “held hostage” by their current employer by these agreements. The proposed rule would not bar “non-solicitation” agreements from being enforced, so long as they are not so broadly written that they function as non-competes. Therefore, a company can still protect its customers from a departing employee, at least for a period of time, but it is less likely that a non-competition agreement can be enforced.

The FTC is still in the “comment period” in developing this rule, which is a required first step for federal agencies with rule making authority, where the agency obtains feedback from businesses and the public in general as to what rule, if any, should be adopted. Whether or not the FTC adopts this rule, the logic behind the proposed rule will be considered by local courts in the future as whether it should enforce a non-competition agreement. Ultimately, a well written agreement, that is actually enforceable has a lot of value to an employer, as opposed to an overreaching agreement. Employers should be concerned about protecting their confidential information and customer base, but there are right ways and wrong ways to accomplish this goal.


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