MACPA's Statement January 2011 - (Page 15)
nEWs & VIEWs
Four key elements of an enforceable employee non-compete
BY EDWARD E. SHARKEY
ost business clients have no trouble grasping the benefit of signing employees to non-compete agreements. Every business has methods, practices, customer lists, etc., in which they have invested resources and which represent value. The prospect that an employee could walk out the door and compete with that information is scary. The trouble comes in crafting an enforceable agreement. Typically, a business will download a form from the Internet, the broadest one they can find. Then, they sign the whole staff to the same agreement. The theory is that a noncompete, like any contract, is enforceable according to its terms. That theory is flawed. What follows is an explanation of why it is flawed and four key elements that a business should consider in crafting a non-compete. Employee non-compete agreements are a restraint of free trade. The law dislikes such things, so courts will not enforce a non-compete unless it is reasonable. The reasonableness standard does not apply to most commercial contracts. In most circumstances, businesses are free to negotiate for the very best terms they can get. When it comes to a non-compete, doing that can make the whole agreement unenforceable. Although the law differs widely among states, courts in the majority of states, including Maryland, apply the Rule of Reason. The gist is that a non-compete is enforceable only if: 1. 2. it is not more extensive than is necessary for the protection of the employer’s business, it does not harm the consumer, and
it does not cause undue hardship to the employee. What does this mean in practice? NOT All EMPlOyEES CAN BE BOuNd. Tying every employee to a non-compete gives a false sense of comfort. Only employees who can compromise the employer’s business will be bound to such limits. This means employees who: have unique skills, are privy to sensitive information, or have been tasked exclusively with customer relations. A court will not enforce a non-compete against other employees. Worse, having a boilerplate form signed by every employee, including the cleaning staff, can impair the employer’s case against a truly important employee. ThE AgrEEMENT CANNOT BE TOO “BurdENSOME.” If enforcing the agreement would cause the employee undue hardship, a court may not enforce it. That’s a tough standard to meet at the drafting stage. In one case, the prospect that enforcing a non-compete would result in a substantial pay cut to the employee was a contributing factor in the court’s decision to reject it. An employer should think critically about what enforcement would mean to an employee and, if possible, craft the needed protection with the least burden to the employee. If nothing else, the exercise of attempting to do this will show both good faith and necessity when it is time to enforce a particular term. 1. 2. 3.
iT CANNOT BE uNliMiTEd iN SCOPE. The geographic reach of the agreement should match the employer’s legitimate need. If the employer does business nationally in a narrow industry, the extent may be national. If the employer delivers milk in one county, it should stick with that. iT CANNOT BE uNliMiTEd iN TiME. The duration of the agreement also must match the employer’s need. The period cannot be indefinite. In some cases, a five-year term has been upheld. Using a term that long, however, is unnecessary for most businesses, and it is highly likely to get the agreement rejected. In many cases in Maryland, two years has been upheld. For most businesses, a one-year period is sufficient. A final note on enforcement: If an employer suspects a former employee is violating a non-compete, it must act quickly. The typical relief is an injunction against the employee. The case depends on arguing that violation of the agreement will irreparably injure the employer’s business if it is not curtailed immediately. This is a hard argument to make if the employer delays bringing an action when notified of the problematic conduct. Edward E. Sharkey is founder of the Law Office of Edward E. Sharkey, LLC, a Bethesdabased firm focusing on business transactions, including the negotiation and documentation of business financing. He can be reached via www.sharkeylaw.com.
Footnotes 1. The firm has drafted a more detailed white paper on this subject for clients and interested parties. It is available for download at www.sharkeylaw.com/publications.
Table of Contents for the Digital Edition of MACPA's Statement January 2011
MACPA's Statement January 2011