So you have fired an employee, and he (and perhaps his new employer) assume that he is now freed from the non-competition provision in his employment agreement. But is that correct? On one hand, how can an employer, with one fell swoop, keep an individual from working for both it and a competitor? On the other, a deal’s a deal, and the employee already received his portion of the deal (a job). The answer, like many matters involving restrictive covenants, is highly state specific and driven by the full set of facts involved.
Starting with the easiest end of the spectrum, there are some states that simply will not enforce a non-compete where there has been an involuntary termination without cause. New York is perhaps the most well-known example, with one court recently capturing the sentiment as follows: “Enforcing a noncompetition provision when the employee has been discharged without cause would be ‘unconscionable’ because it would destroy the mutuality of obligation on which a covenant not to compete is based.”
Most states, however, give an involuntary termination less than determinative effect, although to varying degrees. Pennsylvania, by itself, illustrates the range of impact an involuntary termination can have. In a 1995 decision, the Pennsylvania Superior Court held that an employer who fires an employee for poor performance effectively deems the employee to be “worthless” and therefore, in most circumstances, cannot be heard to argue that the employee should not be permitted to compete against it. (How could a “worthless” employee possibly give rise to the need to restrict competition, the argument goes.) In September 2010, however, the same court held that “the circumstances of termination are but one of many factors to be considered by the court and that the issue of enforceability is to be determined on a case-by-case basis.”
Still other courts, absent evidence that the employer breached an employment agreement with the employee or acted in bad faith, can seem relatively unconcerned about the fact that it was the employer, rather than the employee, who severed the employment relationship. In one case before the Indiana Court of Appeals, the former employee, a doctor, argued that the fact that he was terminated without cause “creates … an issue concerning the reasonableness of the covenant.” The Court, citing the at-will employment doctrine and its respect for and belief in “individual freedom to contract,” disagreed and had no trouble enforcing the non-competition provision at issue.
So what should an employer who, arguably, wants to have his cake and eat it too do? First, think about the issue in the drafting stage and make sure that your agreement expressly provides that the restrictions apply whether the employee is terminated voluntarily or involuntarily and regardless of the reason. Leaving such language out can give a court an easy reason to deny enforcement.
Second, check applicable law. In virtually every state, involuntarily terminating the employee will, at least to some degree, compromise enforceability. The question will be the size of the disadvantage and the weight the court gives to it.
Third, if you are at the termination stage and your agreement provides for enforcement, consider paying the employee during some or all of the restriction period, potentially through a separation or consulting agreement (which would also allow the employee to re-affirm the underlying non-compete agreement).
Fourth, if paying the employee is not of interest or viable, give a hard look to both the reasons for termination and other circumstances at play. For example, in most states, the following factors will mitigate the impact of the termination: it was a high-level and/or long-term employee, the termination was for reasons unrelated to ability or everyday job performance (e.g., attendance, misconduct), and/or the employee held and used significant confidential information. On the other hand, where the employee was relatively low-level, employed for only a short term, worked hard but was a poor performer, and/or did not hold confidential information, your chances for success will likely be more limited.
Lastly, do not underestimate the fact that, unlike other areas of the law, non-competes largely remain creatures of equity, and judges therefore typically have significant discretion to fashion a “fair” remedy — whatever they might deem that to be. Some judges, for a variety of reasons, may simply believe that it would be unfair to enforce the non-compete under the circumstances. You will therefore want to explore your potential pool of judges and select your venue carefully.