When are Non-Compete and Non-Solicitation Restrictions Lawful?
Issue: Companies often use Form contracts which in their stated language make it evident that the non-compete and non-solicitation clause is enforceable to protect the Company’s business interests. Recently, non-compete clauses have been construed by the U.S. Federal agency the Federal Trade Commission to be unlawful, and the matter is pending. There is no question that some States have already taken steps to limit or bar non-compete clauses by legislative action. Using a Form agreement often means that the agreement is not narrowly tailored and may render the agreement unenforceable.
Overview: In many cases, the non-compete clause is a principal asset of the Company. Depending on the drafting of the clause, it will often include a prohibition against ‘competing against the company,’ and often will also include, for good measure, a prohibition against soliciting other employees or contacting clients. In all cases, the drafting of these provisions require a careful review, because there could be loopholes created by less than stellar drafting. These clauses are used often in the securities industry, as well as many other industry sectors.
Throughout the United states, enforceability of non-compete agreements is a question of law and question of fact. These clauses are lawful, provided they are bargained for and the employee/partner/owner received a benefit at the time the provision is signed. For example, “continued employment” is consideration for a non-compete. What is not lawful is to keep a person from earning a living, and any anti-competitive restrictions are generally against the grain of our antitrust laws and the free enterprise system.
For that reason, there must be a balance between analyzing the needs of the employer/professional corporation/LLC to continue and protect its business and the needs of the departing person to pursue their career. To make sure that a proper balance has been met, and the non-compete is enforceable, the legal test is whether the scope and duration of the non-compete is “reasonable”.
Non-Compete and Non-Solicitation Agreements Can Be Negotiated
We frequently consult individual and business clients nationwide regarding non-compete clauses and non-solicitation provisions contained in employment contracts and other commercial agreements, including LLC operating agreements, professional corporations, and other commercial agreements. Frequently, when a person signs their employment contract, they don’t read the fine print, and when time comes to leave their place of employment, they will then ask for a review of the non-compete clause. Even more frequently, the packet that an employee-at-will receives at time of hire contains an agreement that contains a “hidden” non-compete provision of which the employee wasn’t made aware.
Steve has represented employees of securities firms, doctors who join a Professional Corporation and software engineers who join an intellectual property software company and reviewed on their behalf non-compete clauses in the contract. In many circumstances, the “non-compete” is seen as a clause which may not even matter to them at the outset, since everyone hopes that they will have a long and satisfying relationship with a company and their partners.
However, whether it’s for the Company seeking to protect itself against its interests in the event an employee or an employee-partner desires to leave the Company, or an employee, such as a Quant trader or a software engineer, who are frequently asked to sign such non-competes as a condition to employment. For both employer-companies and employees, it is best to be proactive, and have such non-compete provisions reviewed before signing.
In the financial services sector, a trader may be precluded from competing with his former employer, but in most cases, the employer will pay the trader during the so-called restricted period.
However, if after beginning to work at a place of business, or beginning as a member of a professional services firm, the employer or managing partner asks that a non-compete agreement be signed, the facts may reveal that even if signed, there was no consideration given, and the non-compete agreement may not be enforceable. Again, it is a mixture of a question of facts and a question of law that governs the enforceability of a non-compete.
In a case which Steve was representing two of the principals, the two other principals of an equities trading firm using sophisticated algorithm trading were able to avoid the non-compete contained in their LLC Operating Agreement by opting to dissolve the Company by alleging deadlock under the Connecticut state statute.
In most cases, all parties will not seek to engage in expensive commercial litigation to enforce a non-compete. However, in most cases, the business will seek to have a Court order an injunction, prohibiting the departing person from breaching the non-compete clause until either the parties can mediate/arbitrate, or continue with a civil suit claiming damages.
