Our February article addressed the options available to the multi-state employer attempting to design its non-compete agreements within the “tangled mess” of the various state laws applicable to agreements for employees who reside within those various states. In that article, we advised that unless management has the resources to design, update and manage separate agreements tailored to each applicable state law, the best alternative is to design an “asset protection program” to include as few versions of the agreement as possible, tailoring each version to as many, similar state laws and job categories as possible. In this and subsequent articles, we will dig deeper into the variety of business and state law issues involved in this process.
Initially, employers should identify all employee/independent contractor responsibility levels and titles to be covered by the company’s non-compete agreements and the states in which those employees/contractors reside. Here, it is important to note that most state laws will not support the enforcement of a non-compete covenant unless the employer has a material, protectable interest supporting its post-employment non-compete restrictions. Translated, this means that most state laws will not support the enforcement of non-compete or even customer non-solicitation covenants signed by non-supervisory, non-sales and non-managerial employees. So, don’t expect to enforce a non-compete or non-solicitation covenant when it comes to your administrative assistant or your production employees. Furthermore, a detailed analysis of each employee category in the context of applicable state laws as opposed to a “one-size-fits-all” agreement will aid in the enforcement process. By way of example, it may be ill-advised to include non-compete and customer non-solicitation covenants within the agreements designated for North Carolina-based scientists because such scientists do not have access to customers or secret formulas which could be damaging if they leave for a competitor. In states such as North Carolina where the enforcement of a non-compete or customer non-solicitation is somewhat unpredictable, a good solid confidential information covenant may be preferred.
Along these same lines, this first step will also pave the way for other critical discussions with your counsel. The four primary types of employee restrictive covenants – the non-compete, customer non-solicitation, employee non-solicitation and confidential information covenants – have varying applications depending on the nature and level of employee to which the agreement is directed. Each occupies what could be described as a “sliding scale of enforceability. Non-compete covenants which, to some degree or another, restrict a former employee’s subsequent employment in the industry are the most difficult to enforce, followed by the customer non-solicitation, the employee non-solicitation and finally, the confidential information covenant. As such a careful categorization of targeted protectable interests for each employee category and the state laws involved for each will help ensure enforcement and reduce the number of agreement versions your Company is required to manage and update.
We will expand on this analysis in future articles, taking a closer look at other key components of this analysis including adequate consideration, blue-penciling laws and the non-compete versus non-solicitation analysis.
The identification of the state laws at issue. Typically, this will be the states of residence of the subject employees/contractors;
- The analysis of whether this list includes states where applicable laws require employees to be provided some benefit above and beyond continued employment in exchange for their agreement to the non-compete covenant (a/k/a consideration in the form of hiring, a bonus, promotion, etc.). The laws of these states make it very difficult to replace outdated covenants with a universal agreement for incumbent employees absent the expense of additional consideration. As such, if such state laws apply, it may be advisable to implement the newly adopted universal covenants for new-hires only at the time the job offer is made thereby superseding the “old” agreements over time through the process of attrition.
- The analysis of whether there is a common state to which these employees report on a regular basis and whether that state’s laws are favorable to non-compete enforcement. If so, the agreement may include a provision whereby the non-resident employee of a state with unfavorable laws agrees by his/her signature that the laws of the more favorable, “home office” state will apply in regards to the legal analysis of the covenant. (a/k/a choice-of-law provision)
- The identification of the job titles and categories of the signatory employees. This issue paves the way to further analyze whether a non-compete is even necessary or whether a customer non-solicitation covenant will essentially provide the same protections, with an increased comfort level as to the enforcement of such in the majority of or all applicable states. State laws pertaining to the enforcement of customer non-solicitation covenants are far more uniform and predictable than state non-compete laws. As such, the preliminary issue of whether or not to include a non-compete covenant within your company’s restrictive covenant agreement is a critical component to this analysis, deserving of detailed discussions between counsel and management as to both the legal and business ramifications associated with both options.
- Whether all or most of the applicable state laws allow or require a court analyzing a non-compete covenant to “blue-pencil” or modify the covenant if it is otherwise deemed to be overly broad and unenforceable. In essence, judicial blue-penciling or modification allows a court to modify the covenant to fit the particular circumstances surrounding the employee’s departure and competition rather than striking it altogether. For these purposes, if all or most of the state laws at issue allow for blue-penciling or modification, the employer is able to draft and enforce a universal non-compete with broader protections, knowing that the courts will re-draft the covenant to fit the circumstances rather than striking it altogether and thus, leaving the employer with no or limited post-termination, asset protection
These are just a few of the issues at the heart of the company’s decisions regarding the use of universal, multi-state, restrictive covenant agreements. While your natural and understandable reaction may be to move to the next 2015 resolution and thus, avoid these complex and time consuming issues altogether, in the end, the strategic consolidation of your company’s covenants can reap valuable benefits in the end, especially when it comes to ongoing asset protection management and enforcement.