Non-Competes
An employee owes a duty of loyalty to his employer. The employee must devote his entire efforts to the success of his employer's business. The nature of the employment relationship requires that the employer is furthering the interests of the employer during working hours, and prohibits competition with the employer on non-working hours. These principles apply whether included in a written employment contract or not. Some employers may wish to prevent the employee from engaging in post-employment competition: and to accomplish that objective, the employer must obtain a properly drafted covenant not to compete.
Employers seek covenants not to compete for varying reasons.
Sometimes the employer provides the employee with valuable inside information
that the employee could use, or misuse, after leaving the company. There
may be trade secrets; there may be customer lists or information about
sales prospects acquired over the years, proprietary formulas or valuable
source code, for example . Or, the employer may wish to create a confidential
and trusting relationship between employee and customer. The employer may
fear that after investing in the relationship, the employee will take the
customer to another company. On the other hand, some employers seek a covenant
not to compete improperly to restrict the employee's bargaining power.
By restraining the employee's ability to leave the company, the employer
limits the employee's power to demand better working conditions or salary
increases. A covenant not to compete can destroy the balance in bargaining
power between employer and employee; and it is for this reason that the
law watches covenants not to compete with great care. Here we are not
discussing covenants not to compete obtained in connection with the sale
of a business. These latter covenants are more broadly enforceable,
because the seller of the business has been paid for the transfer of goodwill.
The law generally protects freedom to contract and will enforce whatever bargain the parties have made. If you buy a $500 television for $750, in the absence of fraud, the law will stick you with that bargain. If an employee works for $7.50 an hour while everybody else in the industry works for two dollars an hour more, the law enforces that contract as well. But the law polices the bargaining between employer and employee in the covenant not to compete area to prevent unfairness. (In a few states, the covenant not to compete is prohibited by law). In many respects, the courts review covenants not to compete in a fact intensive way, carefully assuring that the particular circumstances do not represent an abuse of the employer's power over the employee. There are several factors which courts focus upon:
Nature of the Position. If the employee provides
no confidential services--is provided no ability to harm the employer's
protectible interests in its goodwill--then a covenant not to compete is
suspect, and will likely be struck down. The courts will not enforce a
covenant not to compete against a custodial worker, a private school teacher,
a secretary, or a dental technician, for example. In these circumstances,
the court assumes that the purpose of the covenant was simply to bind the
employee to a form of involuntary servitude, and prevent the employee's
ability to bargain for better wages or working conditions. On the other
hand, courts commonly enforce covenants against sales employees, at least
with respect to the companies existing customers. Covenants against employees
with access to trade secrets, or who are key managers with central knowledge
of the company's business strategies may be enforceable, depending upon
the circumstances.
Circumstances of Acquiring the Covenant. The courts
carefully police the circumstances under which the covenant was obtained.
If the employee was originally hired without a covenant, the court may
be concerned that the employer used leverage against the employee, the
threat of termination, to acquire the covenant unfairly. Employers who
plan on obtaining a covenant should always notify new hires of the required
covenant in the offer of employment. Courts may be troubled if the employer
notifies the employee that a covenant will be acquired only after the employee
quits his prior job. When an employer demands a covenant from an existing
employee, courts also may require an employer to provide the employee something
new: a better position, higher salary, or job protection, in return for
the covenant. Sometimes courts suggest that this is because the covenant
is invalid, unless there was additional consideration.
Manner of Employee's Departure. If the employee
is terminated without cause, enforcement of a covenant is specially troublesome.
The employer denies the employee a job, yet seeks to prohibit the employee
from earning a living elsewhere. If an employer wishes protection against
an employee who is terminated without cause, the employer should consider
a trade secret agreement.
Post-Termination ConductAs a practical matter,
courts look at what the employee did immediately before and after departure.
If the employee engages in unethical conduct, or specially targets the
employer's customers, or abuses inside information, or uses similar marketing
material, or seems to be taking unfair advantage of the inside information,
then the court is more likely to think that the covenant itself was justified
in the first instances. Employees who engage in ethical post-departure
conduct commonly fair better when litigating with the former employer.
Is the Covenant Reasonable. Courts will scrutinize
a covenant not to compete to make sure that it is not broader than reasonably
necessary to protect the employer's legitimate interests. In Minnesota,
an unreasonable covenant will be "blue pencilled," that is cut back in
duration or scope if the court believes that the covenant is unreasonably
broad.
Professional Covenants: Covenants not to compete
are not enforcible against attorneys in Minnesota, on the theory that they
interfere with clients' free choice of attorney. Clients are deemed to
have an absolute right to have their own lawyer. And so when they come
to a law firm and work with a particular lawyer, they are free to leave
with that lawyer, or stay if they so wish. Law firms do not own their customers.
Medical covenants have been under attack on the theory that they represent
a health access issue. Especially in rural and inner-city areas, where
there are shortages of physicians, a medical covenant not to compete may
force a young physician who finds his existing employment situation unsatisfactiory
to choose between leaving town or remaining in an intolerable situation.
The result may be to deprive a city of a future physician.
State Law. Some states, for example California,
have laws which place severe restrictions on covenants not to compete.
These states approach the issue from the central premise that every person's
labor is his own, and that a contract which restricts the right to work
interferes with a basic human right.
nforcement: In the next section, Enforcing Covenants,
we will discuss how covenants are enforced through temporary and permanent
injunctions and damages in the court system, or through arbitration.
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