Much has been written about non-competition restrictions, including both their pros and cons, and the laws surrounding their enforcement have evolved rapidly. There are, however, a few things basic principles that employers and their advisors should keep in mind when considering this restriction.
It helps to remind ourselves that the restriction isn’t a restriction against competition in general. It is designed however to protect the competitive edge that a company has legitimately created by virtue of a combination of ideas in different spheres of its business, which are unique and known only by those associated with that business. The competitive advantage isn’t necessarily always a high tech invention or a new product, but it could be a new and more effective approach to their market. Companies have spent time, money and human resources in order to research and uncover these unique ideas and/or processes, but suffice to say it is something that is known only by the employees within that company.
For years, the laws of our country have recognized and encouraged this intellectual pursuit and the outcome to create something novel and important for society. It is the very basis of advancements in many different arenas, and with that challenge comes many sacrifices, both financial and personal.
But lately an assault has been waged by legislatures, courts and various organizations against this restriction. I believe that this has mainly occurred because of overreaching and abusive provisions employed, as well as the imbalance in leverage that generally favors the employer.
The purpose of this article is to apprise companies, their advisors and employees of the precepts to a balanced restriction and, hence to successful enforcement of non-competition agreements. This is by no means a guarantee because every case will ultimately turn on its facts; but it does provide some general guidelines to keep in mind when crafting such a restriction.
First, the company must have achieved a competitive edge in the market place that is cognizable, and hence, deserves protection.
Second, the employees covered by this restriction must be in a position within the company that would enable them to know and understand the value of the idea or ideas, usually in the inner circle of the company’s management team. In connection with these employees, the employer must give them something of value in exchange for their willingness to restrict their activities. This can initially be in the form of offering them a position within the company; or if already employed, some form of bonus or benefit plan that allows them to reap some of the benefits of the competitive edge being realized.
Third, the duration and the geography covered must be reasonable, and in many courts’ eyes, cannot prevent the employee from engaging in his or her livelihood upon termination of employment. At times, a severance arrangement that runs the term of the restrictive period will be an ameliorating circumstance in fairly balancing the employees need to work with the company’s need to protect its competitive edge.
Finally, the restriction must be limited to the market already created by the company or a market that they will be imminently entering as a result of this new idea. Hence it must not unrealistically attempt to cover all markets that it could potentially exploit.
This is by no means a comprehensive list of the items to be considered but gives the company and its advisors the basics to consider when developing non-competition clauses or agreements.