Non-compete too tight?
Published in August 1999
Get some background on what's legal and isn't
A software development gig you're considering includes a one-year contract banning you from working for a competitor within a 600-mile radius. You sign the non-compete, satisfied with the cash and stock offer. Then, a year later, you're lured to a rival firm 15 minutes away. Neatly settled in your new Aeron chair from Herman Miller and sipping a Mountain Dew, a letter arrives from your previous employer's attorney, triggering a court hearing. The result: You lose the second job and are forced out of the biz for one year. Thankfully, Target is hiring cashiers.
Sounds unlikely. But as the United States becomes more litigious and many courts uphold companies' rights to protect itself against competitors, you'll see more non-competes. Trying to resolve a non-compete may cost you as little as $150 or as much as $100,000, says Jim Slaughter, a partner at the Greensboro, N.C., law firm Floyd and Jacobs. Slaughter notes that a lawyer's hourly rate affects the ultimate cost of litigation.
Where it all began
Covenants to not compete were frowned upon for centuries, largely because of the nature of work. Back when grandpa was a lad, people who apprenticed in one profession stayed with it for life. Any effort to bar people from working for another company made it impossible to work at all. Thus, courts ruled that such efforts were bad public policy. But that changed in the 1940s, says Slaughter, as courts held that companies sometimes had legitimate reasons to stop employees from potentially aiding a competitor.
In the 1990s non-competes are as common as the Blue Screen of Death, but not necessarily as frustrating. Non-competes have proliferated because "companies don't want to put the money and effort into training someone to have them turn around and leave," says Slaughter. Fundamentally, non-competes are intended to limit an employee from becoming a direct competitor. But when drafting their non-competes, many companies overlook basic contractual elements. Instead they write unenforceable contracts.
Each state court has a different record with non-competes. In general, though, the contracts must include these elements, says Slaughter:
- Non-competes must be in writing. Most courts have ruled that a contract must be written. While you may be ethically bound by a verbal agreement, legally, you may be able to forget it like last year's gossip.
- The non-compete must offer you something, too. For a non-compete to be binding, it must be presented along with some form of compensation - a raise or the promise of a job will do. What one court considers a valid form of compensation might be insufficient in another. For instance, some judges hold that if a non-compete is handed to an employee after they've been on a job for two days, the job itself counts as "due consideration." However, signing a non-compete under the threat of being fired is typically unacceptable. Other courts ruled that if the non-compete is offered simultaneously with a raise or promotion, that's enough consideration.
- Contract duration and geographic limits must be reasonable. There's often a direct relationship between the duration of a contract and the no- man's-land of competition. As the length of the contract gets longer, the geographic region covered in the contract should get smaller; as the duration of a contract decreases, the territory might broaden.
- They must be fair to the parties involved and not be contrary to public policy. Generally, if a court believes a non-compete is overly restrictive (i.e., it hampers you from working anywhere), that clause may void the contract. Yet some judges rewrite unacceptable contracts to make them less restrictive and still binding.
- They must cover only the territory in which the employee has worked. If you work in New York, the contract can't apply to Maine, unless, of course, you did business in Maine, too.
- They must outline the nature of the business. Contracts must specifically describe a company's business, thus making a case for the non-compete.
- They must include the employee's duties. The contract should be limited to a unique set of skills that the employee performs, according to Slaughter. One size does not fit all. The non-compete should be tailored to the worker.
How to negotiate a non-compete
Now you've got some facts you can begin to negotiate your non-compete. Start with the elements that seem unfair or particularly vague. If you can't come to a fair arrangement, look for another job, says Slaughter.
Handling an existing non-compete
It may be best to mention a previous non-compete when an employer mentions theirs. While there's no law requiring you to reveal anything, it's good policy, says Slaughter. "Although awkward to bring up that you have a non-compete, it's essential," advises Slaughter. "[Your new employer] may be subject to a lawsuit as well if they hire you. It's better to be open to an employer about anything that may affect your employment." It's a matter of integrity and trust.
When ending your old non-compete, "it's best to resolve things amicably with the employer," says Slaughter. That might mean sitting down and negotiating what companies you can and cannot work for. But if the contract is so restrictive that it prohibits you from working, it may be worth the money to fight it out, especially if you're a high-paid executive. In some cases, attorneys encourage people to just wait it out, says Slaughter.
Handling an existing non-compete
The laws that govern how courts hear non-competes vary from state to state, says Slaughter. Some states will nullify unfair or unfounded contracts while others will attempt to enforce them. Some states are even legislating the appropriate use of non-competes. In California, for instance, courts now refuse to enforce non-competes unless they relate to the sale of a business.
When to seek a lawyer
Often, people seek legal advice just before they sign a non-compete, says Slaughter. "They want to make sure that they're not signing something that's going to come back and gnaw on them in the future. " Slaughter advises people to look for a business litigation lawyer in the region where your non-compete would be enforced.