Agreeing not to compete

Whatever the economic conditions, good employees are hard to find and even harder to keep. In this increasingly mobile world of instant information and access, it’s easier than ever for those looking to change jobs to find other opportunities.

For years, employers have used noncompete agreements to protect themselves from the harm resulting from the loss of employees — and the personal relationships with and individual knowledge of customers that can leave with them.

A noncompete is basically what it sounds like: an agreement by an employee not to compete directly with his or her employer in a specified business, geography and timeframe after leaving the company. But how effective are noncompete agreements? It depends.

Traditionally, courts upheld such agreements, in the absence of exceptional circumstances. That may no longer be assumed. Many courts are reluctant now to uphold covenants not to compete, perceiving them as restraints of trade unreasonably protecting a business from competition.

Some judges view them as punitive attempts to prevent people from continuing to be employed in their chosen profession or to prevent them from leaving. Therefore, judges increasingly seek a way out of non-competes. Those written in overly broad terms or that contain ambiguous provisions can provide a judge with the means to strike out certain portions, if not the whole agreement.

In addition, the law regarding noncompetes is state specific. That means if you do not have a choice of law provision (even sometimes if you do) and are doing business in multiple states, the precedents and interpretation — and possibly the outcomes of disputes — may vary from state to state.

When drafting noncompetes, keep the following in mind for agreements that work for you and your employees — and ones that judges can live with, too.

1. Don’t overreach

The key to having a noncompete restriction enforced is to not be greedy. While the strategy in drafting these agreements is often to get everything possible, this can backfire. Consider carefully what your real concerns are in terms of this employee changing jobs. Avoid an overly inclusive approach to make it acceptable to an employee and keep the agreement palatable to a reviewing court.

2. The shorter the timeline, the better

While noncompetes written 15 years ago may have barred certain employment for 10 years after termination, it is more common and acceptable now for the restriction to be two years or less. Particularly in highly technical industries where information and training become obsolete more quickly, courts may find longer restrictions unreasonable.

3. Define the industry realistically

Rather than restricting future employment in the computer industry, for example, an employer should consider excluding only certain industry segments, such as applications for medical entities only or software as opposed to hardware. Or limit the restriction to specific customers with whom the employee has had the most contact, rather than restricting all customers in an industry, regardless of the level of contact. Less is better when it comes before the court.

4. Tailor the geography

Geographic restrictions should be tied to specific facts and may need to be crafted individually with different language for different employees. If the business competes internationally, and one employee handles electronic inquiries worldwide while another handles accounts only in Ohio, the geographic scope of the noncompetes should differ.

5. Be precise

Drafting a noncompete agreement imprecisely can have surprising results. The employee — and ultimately, a judge — may interpret it in a way never intended by the employer. In a case we handled involving a beauty salon, the geographic restrictions in the agreement were viewed very differently by the employer and our client, the employee.

The employer had drafted the agreement to restrict ex-employees from working at salons within 15 miles of the employer’s salon. After some employees left to work for another salon, the employer sued, claiming they had violated the geographic restriction in their noncompete. But was it 15 miles as the crow flies or 15 miles as measured by an odometer if driving from one salon to the other? And by what route?

The interpretation of this provision made a big difference — read one way, it was arguably violated, read a different way, it clearly was not. The case settled, as most dealing with noncompetes do. However, the uncertainty of how the provision would be interpreted played a part in the ultimate resolution.

Properly drafted noncompetes, thoughtfully considered with the assistance of experienced legal counsel, can be valuable business aids. But they have to balance the employee’s right to make a living and build on his or her skills with your right to protect your investments in training and developing that employee. Laura Kuykendall ([email protected]) is a partner in the Columbus office of Vorys, Sater, Seymour and Pease LLP, where she practices primarily in the areas of antitrust law, commercial and corporate litigation, corporate takeover litigation and trade secrets law.

A matter of law is presented by Vorys, Sater, Seymour and Pease LLP in cooperation with SBN Magazine.