Noncompetition agreements are often overturned if they hinder an employee’s ability to earn a living. Employers should consider geographic or time limits in such pacts and make sure employees receive some consideration in exchange for agreeing not to compete.

Employee Went Straight to Work for Top Competitor
“That noncompete agreement isn’t worth the paper’s it’s printed on,” asserted salesman Jeremy Reynolds. “I’m not even selling in the same region.”

“That doesn’t matter. You signed an agreement not to go to work for our main competitor,” HR Director Roosevelt Cooper responded. “And we intend to hold you to it.”

Was the agreement unreasonable?

Facts: The employer manufactures valves, couplings, sprinkler heads, and other mechanical devices for use in a variety of industries. The employee worked for the company from 1998 until the end of 2006, primarily assigned to Ohio, West Virginia, and western Pennsylvania. In addition to working with clients, he also trained new sales representatives in various states.

When the employee joined the company, he signed a covenant not to compete with the employer. The agreement stipulated that he would not distribute the kinds of products the employer sold for 12 months within a 10-state geographical area or on behalf of nine specific competitors. He also agreed not to solicit the employer’s customers.

After leaving the company, the employee immediately began working as a sales representative for one of the named competitors, selling the same kinds of products he sold for his former employer, but not in his former region. Right after the employee joined the competitor, he and the competitor filed a declaratory judgment action against the former employer in federal court seeking a declaration that the covenant not to compete was invalid.

The former employer counterclaimed against both for breach of contract, misappropriation of trade secrets, tortious interference with contractual relations, and unfair competition, and then filed an almost identical lawsuit in a federal court in Pennsylvania. The cases were consolidated in the federal court in Pennsylvania.
The trial court found the noncompete pact was unreasonable and refused to grant the former employer’s request for a temporary restraining order to stop the employee. The former employer appealed.

Award: The trial court acted too quickly in finding the noncompetition agreement was unenforceable, given the complexity of the agreement, the U.S. Court of Appeals for the Third Circuit ruled Aug. 23 (Victaulic Co. v. Tieman, 3d Cir., No. 07-2088, 8/23/07).

Discussion: The Third Circuit said that the trial court’s rejection of the agreement lacked the necessary analysis to justify finding it was unenforceable. “At this stage, [the former employer] has asserted a legitimate interest in protecting its customer relationships,” the appeals court said.

The Third Circuit also found the geographic limitation in the covenant was not clearly unreasonable. “In this Information Age, a per se rule against broad geographic restrictions would seem hopelessly antiquated,” the court said.

“Whether a covenant not to compete is unreasonable is a holistic inquiry, particularly when the covenant is detailed and nuanced,” the court said. “It requires balancing the employer’s need to protect its investment and disclosures against the employee’s need to earn a living in his chosen field and the public interest, and then determining whether the covenant comes reasonably close to that balance.”

Pointers: Because noncompete agreements may limit an individual’s ability to practice a particular trade or profession, state laws and court rulings have placed some restrictions on the agreements, such as:

• Geographic limits. Noncompete agreements that prohibit former employees from practicing the same trade within the same geographic area served by their former employer are viewed more favorably by the courts than agreements that bar former employees from practicing the same trade anywhere.

• Time limits. Agreements that bar former employees from working for or establishing a competing business during a limited period after terminating employment are more likely to be enforced than agreements with no time limits.

• Consideration. Employees typically must receive something of value for signing away their rights. Making job offers contingent on signing a noncompete agreement is one form of consideration. However, some courts require proof that employees have received valuable training, education, or experience through their employment that is not available through other means.
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It is important to remember that a non-compete agreement is going to have a better chance of being enforced based on when the agreement was signed.

Agreements signed at the beginning of employment, at the time of a pay raise or promotion, or at the time an employee is offered additional training are going to be viewed as more enforceable as opposed to those that are signed at the end of the employment relationship. Organizations that secure an agreement to not compete at the end of the employment relationship are going to find it difficult to enforce the agreement unless the business can demonstrate that the “consideration” given to the departing employee was substantial – and would most likely require the payment of cash as opposed to other forms of consideration.

It’s also important to remember to remind employees of their agreements not to compete or any other written agreements for that matter. It is a good practice to notify each employee on a consistent basis, for example at the beginning of each new year, in writing of the existence of the agreement and the expectations of the business concerning the agreement(s).

It’s like my grand dad used to say…no sense in shutting the barn door after the horse has gotten out, and keep the darned door closed because the horse aint going to close it for you…

We hope the information provided in our HR Updates assists you with running a better business in less time. It is our goal to help you get back to business.

Randall Barker is the VP of Human Resources for A Plus Benefits, Inc.

Read Randall’s previous HR Update.