The sluggish New England economy has kept the issue of the enforceability of noncompete agreements a front burner issue for in-house attorneys.

Experts tell Lawyers Weekly that they remain alive and well, although restrictions on disseminating trade secrets and soliciting co-workers to join a competitor are more likely to survive court challenges than restrictions on individual employees leaving to work with competitors.

“Non-competes have long been disfavored by the courts because they tend to stifle competition,” said Richard Reibstein, a New York employment attorney who co-authored a book on employment law.

Reibstein said the thrust of recent court decisions is to require that covenants be drafted both in a reasonable fashion and enforced in reasonable circumstances.

“There are two parts…an agreement could be drafted beautifully but, if enforced, could be unreasonable when applied,” he said.

Carl Khalil, a Virginia Beach attorney who makes a living helping clients get out of non-competes, has seen an up-tick in his business lately, which he attributes to increased layoffs, and the confusion this creates around the enforceability of the covenants.

His website, breakyournoncompete.com, offers defenses that may help employees wiggle free of the terms of an agreement, including layoffs, firing without cause, overbroad agreements, illegal conduct by the employer, failure of the employer to enforce the non-compete against other departing employees, and others.

(See “Lawyer Launches Website To Challenge Non-Competes,” Lawyers Weekly USA, Dec. 11, 2000; Search words for LWUSA Archives: Digges and Khalil.)

But while courts are more aggressively scrutinizing the terms of these covenants before upholding them, lawyers have responded by drafting more narrowly-tailored terms with the hope that a court will see that they exist only to protect legitimate business interests and not as blanket prohibitions that limit an individual’s ability to earn a living.

Virginia attorney Kevin Martingayle said that many employers have devoted time to redrafting their agreements “rather than trying to enforce their old ones.”

Atlanta attorney Brian Pastor agreed, noting the “phenomenon” that more employers are deciding to not enforce valid non-competes “as long as they’re convinced that even if the employee went to a competitor, the former employee is not calling on the employer’s customers.”

On the flip side, he said many employees who approach him “rarely have the means or are willing to pay the legal fees to get the agreement declared unenforceable. They end up simply taking their chances that their former employer won’t sue.”

Toned Down, But Broader Reach

Paul E. Stanzler, a labor and employment attorney in Boston, noted a trend toward the use of non-solicitation agreements as opposed to the more traditional non-compete, particularly in the high-tech sector, where it isn’t uncommon for employees to leave their employer to launch their own companies. The non-solicitation agreements bar them from taking their former co-workers with them.

He also said that when it comes to enforcing the geographic scope of traditional non-competes in the high-tech industries, almost anywhere is fair game.

“Employees in software and biotech are using the Internet and are selling or servicing nationwide, so courts will enforce nationwide restrictions in these instances,” he said.

But the terms and validity of non-competes varies from industry to industry.

Broadcast industry employees, for example, have been fighting a battle over the use of non-competes for non-sales broadcast employees, and are winning.

The crusade is being led by AFTRA, The American Federation of Television and Radio Artists, which argues that radio and television stations are unable to define legitimate business interests – like client lists, confidential information or trade secrets – like other industries can, and therefore the covenants unnecessarily restrain broadcast professionals from pursuing gainful employment.

In fact, legislation has been enacted in Maine and Massachusetts that effectively bans the use of non-compete clauses in employment contracts of non-sales broadcast employees.

But employees in other industries haven’t been so lucky, and still find themselves subject to the clauses that show up either in employment contracts before their employment with a company commences, or in severance packages, when employment ends.

Arnold Pedowitz, a New York attorney and associate editor of the ABA’s “Covenants Not To Compete: A State-by-State Survey, 3rd Edition” (available at bnabooks.com), said there’s no need for a head-butting contest between employees and employers.

“You can’t negotiate around or away from a non-compete until you really know what factors are present in the job,” he said. “If an employer has legitimate business interests at stake, then cater [the covenant] to those legitimate interests.”

Reibstein added: “The drafting of enforceable restrictive covenants is becoming more and more of an art form [and] judicial forgiveness in this area of the law is a thing of the past.”

A Sound Covenant

Experts told Lawyers Weekly there are some creative drafting techniques, negotiating points and defenses that attorneys faced with these issues might want to look to.

Experts recommend that companies review their current covenants in light of the most recent case law in their jurisdiction.

Pastor said, “I tell my clients that we need to revisit the issues every six months because in Georgia, all new case law in this area applies retroactively to invalidate agreements that had previously been valid.”

He noted that when employees come to him with non-competes, 95 percent of them are unenforceable on their face under state law because out-of-state lawyers who represent large companies may have drafted them.

On the other side, Reibstein sees many employers faced with the dilemma of whether to revise existing covenants that may have become unenforceable based on current law.

But he said if the new agreements were “less burdensome and more reasonable than the ones being replaced, after a short explanation by well-trained managers or human resources staff,” incumbent employees would be more willing to sign off.

The lesson learned from the past is that a court will not uphold an overly broad covenant.

Martingayle called it the “janitor defense.”

“I work as a pest controller for Terminix and I leave, having signed an agreement that says I cannot work in any capacity for the competition. I show up as head of janitorial services for Orkin. What legitimate business interest is Terminix protecting by keeping me from working in any capacity for Orkin? None.”

Other Considerations

Whenever an employer considers enforcing a non-compete or an employee considers breaking one, they should consider several factors:

Length of employment.

In some instances, courts will strike down non-competes where the employment situation was short-lived.
Firing without cause.

In some jurisdictions firing negates a non-compete while in others, employers can still try to enforce the agreements.
Breach of contract by employer.
No matter how minor – like failure to give a bonus or pay all wages due – any breach of contract should be raised as a defense or a factor against enforcement.
Layoffs.

Many states will strike down agreements where an employee has been laid off.