As you probably know by now, we here at Suits by Suits have been tracking the rapid developments in state law governing the interpretation and enforceability of covenants not to compete contained in employment agreements. (Our most recent posts on the subject are here and here.) Generally, the theme at the state level has been towards restricting the scope and enforceability of such clauses; be it California’s decision to essentially prohibit all such noncompete provisions, or Massachusetts’s more nuanced attempt to narrow the scope of noncompete clauses by statute.
Today, however, we look at how the private sector – specifically, international consumer electronics retailer Best Buy – has struck back. Read on....
Last week, reporter Thomas Lee of the Minnesota Star-Tribune broke the story that Best Buy Co., Inc – which employs 5,200 people at its corporate headquarters in the Minneapolis suburb of Richfield, MN – had offered hundreds of its mid-tier executives down to the vice-president and directors level future stock considerations in exchange for signing a covenant not to compete that would prohibit former Best Buy employees from taking a job at a competitor anywhere in the world or otherwise “using any idea or experience” gained during their employment for a period of 12 months after leaving the company. The noncompete announcement comes just five weeks after Best Buy announced that it would overhaul its executive compensation program to increase transparency to stockholders and reduce so-called “golden parachutes” to departing executives.
The question now becomes: is Best Buy’s new noncompete agreement enforceable? The answer, as you might suspect, is that “it depends.”
Best Buy’s amendment does clear at least one threshold hurdle. Typically, covenants not to compete are contained in an employee’s initial contract of employment (or, if the employee does not sign an individualized contract, within the employee’s handbook or manual). If a company wishes to change its policy with respect to existing employees, it may face issues regarding the contractual requirement of consideration; that is, that both parties must “get something” in an exchange for the contract to be legally enforceable. If an employer simply changes its policies midstream, existing employees who are forced to sign on to the new provisions may have a viable argument that they did not receive anything of value in exchange for their signature and thus that the provision fails as a matter of basic contract law. Here, Best Buy avoided that potential obstacle by tying the new noncompete clause to additional future stock considerations.
Once the contract clears the consideration requirement, the legal inquiry then shifts to the substance of the performance demanded. Here, the question will vary based on what state law applies. Although we do not have a copy of the Best Buy agreement at issue, it is reasonable to presume that the agreement has what we call a choice-of-law clause; that is, that it specifies that in the event of a dispute, one particular state’s law applies to that dispute. (And we further presume that the choice-of-law clause does not specify the state law of California!) Such clauses are presumptively valid, although in certain circumstances they may be overridden by a court.
Although we do not know which state law may or may not apply to a given hypothetical dispute regarding the Best Buy contract, we can state that generally, the law in most states that uphold the enforcement of some covenants not to compete balances the employer’s interest in protecting intellectual property, confidential business practices and other information, and confidential client lists against the employee’s interest in pursuing other employment. The balance struck is typically defined in terms of “reasonableness,” with two key factors used to help judge the reasonableness of the restraint: time and geography.
Thus, any employee challenging Best Buy’s future efforts to enforce its noncompete clause will likely advance three arguments:
First, the employee will challenge whether Best Buy has sufficient confidential, proprietary, or other secret information to protect at all. Best Buy is, of course, a public retail store engaged in the sale of widely-available commercial electronics and goods to the public as a whole. Of course, some businesses open to the public have significant intellectual property interests – think about the Colonel’s “secret recipe” for fried chicken as one obvious example. Unlike Kentucky Fried Chicken, however, Best Buy doesn’t make anything of its own; it simply resells products manufactured by others. Moreover, the other services that Best Buy provides – such as installation, servicing, and repair – are not the kind of services that typically lend themselves to confidential client lists or other information that courts recognize as confidential and sensitive. But that doesn’t mean that Best Buy has no legitimate corporate secrets; for example, much as airlines and hotels engage in proprietary preferential pricing to sell surplus rooms and seats, Best Buy may have sophisticated computer algorithms that govern how stores set prices for particular items in light of other brick-and-mortar as well as online retailers. Thus, it’s plausible that Best Buy may be able to establish in court that it has legitimate corporate secrets that require protection.
Second, the employee may argue that the length of time is too onerous to be “reasonable” to protect Best Buy’s intellectual property. Here, a 12-month covenant not to compete is on the lengthy side, but courts have upheld clauses extending out for a year or more.
Finally, the employee will argue that the Best Buy covenant not to compete is not sufficiently restrained in geographic scope because the clause prohibits an employee from working for Best Buy’s competitors anywhere in the world. Here, Best Buy will simply have to concede that its provision is not restricted in geographic scope but argue that the balance of harms favors it and not the employee.
The bottom line is that we’re seeing a large, multi-national employer’s response to the shifting legal atmosphere with respect to covenants not to compete as staking out an aggressive ground that would prohibit a significant number of its employees from seeking a large number of jobs anywhere throughout the world. It will be fascinating to see how the courts respond.