Is Your Non-Competition Restriction Enforceable?

While it may be true, as is often suggested, that many non-competition agreements in the employment setting are unenforceable, that need not be the case. As case law in this area has continued to evolve, it has become more apparent that the enforceability of such restrictions will in many cases boil down to narrowly and carefully worded language.

It bears emphasis at the outset that non-competition restrictions are governed primarily by state law. The case law in this area can fluctuate significantly from state-to-state. Accordingly, companies considering the use of such restrictions should, with the assistance of counsel, determine the applicable state law, and prepare its agreements in close observation of case precedent and applicable restraint of trade laws in that state.

Also, caution should be exercised in using a “choice of law” provision in a non-competition agreement that seeks to apply the laws of a state different than the state where the employee will be working. For public policy reasons, some courts will impose the laws of the state where the employee is working despite an agreed “choice of law” provision to the contrary. Therefore, if the employee will work in a state that is different than the state where the company is located, the laws in each state should be considered.

Regardless of the state law that will apply, businesses unquestionably face an uphill battle in crafting enforceable non-competition restrictions. In most jurisdictions, such restrictions are disfavored by the courts, which will closely scrutinize their use to determine whether they are reasonably designed to protect legitimate company interests, or oppressive restrictions designed to unfairly stifle competition. For example, although a company may have a protectable interest in preventing competition by its Director of Marketing and Sales (i.e., protection of its customer relationships), it may not have a protectable interest in preventing employment by an administrative assistant by another company in the same line of business. The employer should, in all cases, identify the interest that it is seeking to protect, and determine whether a post-employment restriction is necessary to protect that interest.

Many employers do not engage in this analysis, and therefore, overuse these restrictions. Unlike non-disclosure agreements, which may be legitimately be required of all employees as a matter of company policy, the decision to require a non-competition restriction should be made on a case-by-case basis after careful consideration of all the relevant factors.

Even if the employer has a protectable interest sufficient to justify a non-competition restriction, problems in draftsmanship frequently occur. All too often, the restriction is overbroad. In most states, if the provision seeks to prevent activities that are reasonably necessary to protect the employer’s legitimate interest, but also prevents activities that are outside of that realm, it will likely be struck down. Moreover, many state courts will not rewrite an overbroad restriction to cover only the protectable interest. It becomes critical, therefore, that companies employ counsel to prepare restrictions that are narrowly drafted. The duration and geographical scope of the restriction are also important considerations in preparing a narrow, and therefore, enforceable restriction.

A recent Maryland case, Deutsche Post Global Mail, Ltd. v. Conrad, 292 F. Supp. 2d 748, 756 (D. Md. 2003), aff’d, 2004 U.S. App. LEXIS 24249 (4th Cir. 2004), highlights the importance of narrow drafting, and perhaps signifies a trend toward even closer scrutiny of non-competition agreements. In that case, two sales managers were subject to post-employment restrictions that prohibited them from soliciting any of the defendant company’s customers. They subsequently left their employ, started their own business, and solicited the defendant’s customers. In response to the defendant’s suit for violation of the restriction, the court found the provision to be overbroad, explaining that the two former employees did not have any contact with many of the company’s customers while they were employed there. The court noted that a valid restriction would have prohibited solicitation only of those customers with which the former employees had contact during their employment. Although the court recognized that the facts in the case were somewhat unique (in that the defendant’s size and presence in the marketplace were significant), this decision nonetheless emphasizes the importance of using restrictions that are narrowly drafted.

Needless to say, non-competition agreements are, perhaps now more than ever, closely scrutinized by the courts, in many cases word-for-word. However, this need not necessarily deter companies that have a legitimate and protectable interest from using them. Rather, companies should recognize that such restrictions should be used selectively and prepared narrowly, with the assistance of counsel, in accordance with state law requirements.