July 24, 2017
Authored by: Jay Warren, Jay Zweig, Anthony George, Chris Galanek, Brian Sher and Mark Deiermann
In mid-May, the New York Times published a long article reporting a national trend that employers are expanding both the number of employees who are required to sign non-competition agreements and the types of employees required to sign these agreements. The article emphasized stories of low-paid, low-level employees who could not find a new job, or had to take a lower paying job, because they signed a non-competition agreement. The Times ran an editorial that urged legislatures to prohibit employers from restricting the employment opportunities of lower paid employees.
What is missing from this picture?
While the Times article mentioned states vary in enforcement of non-competition restrictions, noting that California prohibits all restrictions on employees moving to new jobs, it did not explain the important differences in how states other than California enforce non-competition restrictions. The Times article also did not report the damage to a business that may result from an employee’s taking advantage of trade secrets learned while working for the former employer, or of customer relationships that were entrusted, to compete unfairly with the former employer.
We asked a few of our non-competition attorneys for their perspectives on some of the questions raised by the Times article: Why do companies require lower-level employees to sign non-competition agreements? How typical is it for companies to seek to enforce those agreements for lower-level employees? How do courts in each state respond to those enforcement efforts?
Under Arizona law, restrictive covenants are disfavored and are construed narrowly by courts. Judges have substantial discretion in applying the facts of each situation to the law, which makes this area of contract enforcement often uncertain. Companies generally should draft post-employment restrictions narrowly as possible to protect their business. Under Arizona law, overbroad covenants can be blue-penciled but not rewritten; therefore, overbroad covenants may end up being unenforced if they are overbroad and cannot be blue-penciled. Senior executives, salespeople, and those involved in direct customer service roles who have substantial contacts and influence with customers and knowledge of business plans and metrics are more likely to have restrictive covenants enforced against them as opposed to lower-level or clerical workers.
Non-compete agreements can be enforced in Arizona if they are reasonable in time, geography and the activity prohibited. But these are the hardest restrictions to enforce. Non-solicitation or other agreements that protect customer relationships for a time period allow the employer to hire a replacement and have that new employee develop a rapport with those customers. A key to enforcement is to word these agreements in plain English and to avoid a debate about “who solicited whom”.
Confidentiality agreements and the protection of trade secrets are two other areas where employers can take preventative steps, not only in protecting their own confidential information, but also in avoiding hiring an employee who takes protected information from their prior employer and in doing so creates potential liability for the new employer. In this area, courts are likely to protect non-public information and enforce confidentiality agreements, regardless of the employee’s rank or position, so long as the confidentiality agreements do not overreach into areas of public or common knowledge and are not a backdoor attempt at a non-compete. Companies are prudent to examine how they protect their own confidential information and also how they avoid having a rogue employee make a misstep that subjects the employer to unfair competition or trade secret theft claims.
The bottom line in Arizona is that having updated restricted covenants agreements, clear policies and practices on confidential information, and being mindful in the hiring and firing process will protect a businesses’ competitive advantage, make outcomes more predictable if litigation is required to enforce agreements, and deter departing employees from stealing customers and data. Relying on outdated or overly broad agreements can prove costly and erode employee and customer goodwill. Companies should also tailor the level of post-employment restrictions depending on the employee’s function and contacts with customers.
We do not frequently see Colorado employers attempt to enforce noncompetition agreements against lower-level employees, except where significant customer relationships or genuine trade secrets are involved. Colorado statutorily prohibits all noncompetition agreements except those that are (a) in connection with the sale of a business, (b) for the protection of trade secrets, (c) to recover certain training and education expenses, or (d) with “executive and management personnel and officers” or their “professional staff.” Noncompetition agreements with officers, executives and managers are routinely enforced. The “professional staff” aspect of the fourth exception has not been judicially clarified and is rarely used as a basis for enforcement.
Enforcement actions against lower-level employees are generally brought under the “trade secrets” exception, typically against sales personnel with key customer relationships or against other employees in possession of trade secrets. While customer relationships themselves are not a trade secret, specific information regarding customers (such as customer lists, customer preferences, and pricing information) can constitute a trade secret in some cases, and Colorado employers will often rely on such an argument when seeking to enforce a noncompetition agreement against nonmanagerial sales personnel. Outside of the sales context, the enforceability of a noncompete against lower-level employees depends on the degree to which the employee possesses confidential information that rises to the level of a trade secret and the degree to which the employer took adequate steps to protect those trade secrets.
Georgia is now a business friendly state when it comes to enforcing restrictive covenants in the employment context. Prior to May 11, 2011, there was no statute in Georgia governing the enforceability of restrictive covenants. There was, however, a lengthy common law history of courts enforcing restrictive covenants against employees, including route sales people, delivery drivers and exterminators who had low-paying jobs and de minimis customer contact. On the other hand, under Georgia case law, overbroad employee noncompetes could not be blue-penciled or modified and, therefore, were often held unenforceable. This “no blue pencil” rule, combined with drafting traps for the unwary, caused many to view Georgia as a “problem” state in terms of noncompete enforceability.
Georgia’s common law is still applied to agreements entered into prior to the enactment of Georgia’s Restrictive Covenant Statute on May 11, 2011, including Georgia’s pre-statute refusal to blue pencil or modify over-broad restrictions. Nevertheless, a narrowly and properly drafted pre-statute agreement can be enforced in many contexts against what would be considered lower-level employees.
Pursuant to the current Georgia statutory scheme, post-employment covenants not to compete, as opposed to customer non-solicitation or non-disclosure provisions, are permitted with regard to employees who (1) customarily and regularly solicit customers or prospective customers; (2) customarily and regularly engage in making sales or obtaining orders or contracts for services or products; (3) are in a management position, who regularly direct the work of two or more employees and who possesses the authority to hire or fire employees; or (4) perform the duties of a “key employee” or a “professional.” The definition of “key employee” is very broad and includes any employee with specialized skills or who has obtained customer contacts or customer information by reason of his or her employment. Moreover, all employees may be subject to a valid non-solicitation or non-disclosure agreement.
Today, Georgia courts appear receptive to lawsuits seeking to enforce restrictive covenants against employees at all levels under the current statutory scheme, if the employees fit within the parameters of the statute, with the articulated public policy being that post-employment restrictions on competition are an appropriate means to protect the business interests of Georgia companies. The statutory scheme also contains a number of favorable presumptions for a business seeking to enforce such restrictions.
Illinois courts generally disfavor employer-employee restrictive covenants. Consequently, courts look for reasons not to enforce restrictive covenants and the fact that an employee is “low level” often creates an equitable reason for the court to refuse to enforce restrictive covenants. However, bad conduct by a former employee, whether by taking confidential information or poaching former customers of the former employer, often will overcome a court’s reluctance to enforce a restrictive covenant against a low-level employee.
Historically, Illinois courts only enforced such restrictive covenants if the employer could demonstrate it had a legitimate protectable interest. Courts defined legitimate protectable interest to include “near permanent customer relationships” or confidential information. In 2011, the Illinois Supreme Court revisited this issue in Reliable Fire Equipment v. Arredondo, holding that an employer must demonstrate both a legitimate protectable interest and the reasonableness of the scope (activity, time and geographic). However, the Reliable Fire court also held that an employer could establish a legitimate protectable interest in ways other than confidential information or long-standing customer relationships, creating further confusion in the Illinois legal landscape. This ruling required trial courts faced with a motion for temporary restraining order seeking to restrain a former employee from competing to focus on what interest an employer is seeking to protect and whether that interest is sufficiently clear at a preliminary stage such that a TRO is justified. Generally, Illinois courts have looked to two key issues in recent years—has the former employee “taken” confidential information and is the former employee using such confidential information to pursue his former employer’s clients. If the answer to either of these questions is yes, Illinois courts are likely to enforce a restrictive covenant.
An interesting dilemma has arisen in the last four years since the Illinois Appellate Court decided Fifield v. Premier Dealers Services. The Fifield court held that at-will employment is inadequate consideration to support restrictive covenants until at least two years of at-will employment have passed since the agreement was put in effect. This creates another hurdle for enforcing restrictive covenants against lower-level employees. Most low-level employees are employees at will. Consequently, for an employer to be confident that its restrictive covenants will not fail for lack of consideration, some unrestricted consideration (e.g., a signing bonus) must be provided at the outset of the employment relationship.
Missouri employers usually attempt to enforce noncompetition agreements where necessary to protect their customer relationships or trade secret information. This is especially true regarding officers, executives and managers since they ordinarily will have important, protectable relationships and/or will be able to exploit the former employer’s confidential information if allowed to work for a competitor. Noncompete provisions are important partly because they can prevent the employee from being positioned to exploit confidential information on a competitor’s behalf.
Lower- or mid-level employees may not pose this type of threat. However, numerous such employees are provided with confidential information they could exploit if allowed to help a competitor compete, and enforcement would be appropriate in Missouri under these circumstances. Similarly, lower- or mid-level personnel who have significant customer relationships can also hurt a company by exploiting goodwill developed at the employer’s expense. Where an employer pays its employees to develop, solidify or enhance customer relationships, the employer usually can protect those relationships through enforcement of customer-based restrictive covenants.
In New York, companies usually go to court to enforce a non-competition agreement where there is an imminent threat either that they will lose customers or that confidential, competitively valuable information will be misused. Lower-level employees often may not pose these types of threats. However, there are numerous lower- or mid-level employees who are provided with confidential information that they could exploit if allowed to work for a competitor. Former employees will rarely if ever admit they plan to use their former employer’s confidential information, and noncompetition provisions are important partly because they can prevent the employee from being positioned to exploit the information on a competitor’s behalf.
When an employer justifies enforcement based solely on confidential information, New York courts may require evidence the employee misappropriated the information and is using it to obtain a competitive advantage. Misappropriation can include copying or transmitting electronically stored information, taking documents, or intentionally memorizing client lists or other confidential information. For a lower-level employee, an employer normally must show more than the employee had access to confidential information.
Lower- or mid-level sales personnel – and many other employees who have significant customer relationships – can also hurt a company by exploiting goodwill developed at the employer’s expense. Under New York law, courts will protect customer relationships that former employees develop at the company’s expense, e.g., through introducing new employees to current customers, expending company resources in generating leads, or providing expense accounts. But courts applying New York law generally will not enforce a noncompetition restriction to protect customers with whom the employee had no involvement, or who first became customers because of the employee’s prior business or social relationships (except, perhaps, where the employer made a substantial investment to establish or expand the customer relationship).
Also, New York State courts in New York City and surrounding counties will not enforce non-competition agreements when an employee is fired “without cause” (unless, perhaps, the employee is being paid by the employer during the non-competition period). Courts in upstate New York, and federal courts in New York, will consider a termination without cause as a factor, but not as a strict bar, in deciding whether to enforce a non-competition restriction.
Bryan Cave LLP has a team of knowledgeable lawyers and other professionals prepared to help employers assess the enforceability of any restrictive covenant. If you or your organization would like more information on restrictive covenants or any other employment issue, please contact an attorney in the Labor and Employment practice group.