New England Biz Law Update
Too often, a company loses a preliminary injunction motion to enforce a non-compete agreement because of mistakes made when it drafted the non-compete. Spending tens of thousands of dollars to get to the hearing is an expensive way to find out that your non-compete is not as enforceable as you hoped.
Avoiding these mistakes at the drafting stage is a much cheaper way to ensure that your non-competes will protect your company’s legitimate business interests. Here are the seven worst non-compete drafting mistakes and how to avoid them before you get to litigation:
1. No consideration supporting the non-compete.
Like all contracts, non-competes must be supported by consideration. In Massachusetts, as in many states, the job itself can be sufficient consideration for the non-compete.
But it’s less certain that continued employment will support a non-compete after the employee’s been on the job for a significant amount of time. If a new non-compete relates back to the original employment agreement, the courts will generally find continued employment to be enough support for the non-compete.
But where a non-compete is established well into an employee’s tenure, courts will often require more consideration than just the continued employment.
Recent Massachusetts Superior Court decisions have revived a little-known principle of Massachusetts non-compete law: That when the job itself is the consideration for the non-compete, and that job substantially changes, the non-compete is no longer enforceable.
For example, in Cypress Group v. Stride & Associates, 17 Mass. L. Reporter 436 (Mass. Super. Ct. 2004), the judge ruled that the non-compete of a salesperson who later became a sales manager was unenforceable because of the substantial job change.
To avoid this problem, tell your human resources people to keep track of the job changes of employees with non-competes. When their jobs change, they need to get a new non-compete. Or have your company give the employee something else of value – like cash, a new title, or stock options – in exchange for the new non-compete.
2. Overly broad scope or duration.
This is the one you hear about the most. To be enforceable, a non-compete agreement must be reasonable in geographic scope and duration. Many lawyers are also aware of the so-called “blue-pencil doctrine,” under which a court will strike out an unenforceable clause and enforce the remainder of the non-compete.
While this is the law in Connecticut and Maine, most states – including Massachusetts, New Hampshire, Rhode Island, and Vermont – do not have a clearly established blue-pencil doctrine. While courts will sometimes pare back an overly restrictive term in order to save an otherwise-enforceable non-compete (cutting a three-year restriction, for example, to one year), more often than not the court will toss the whole thing.
Don’t write your non-compete broadly and assume the court will only enforce what’s necessary. Instead, draft your non-compete narrowly to provide only the protection you really need.
3. Using a standard agreement instead of a custom-tailored one.
Most companies understandably prefer to have standard, one-size-fits-all agreements for all their employees. But this is not necessarily the best policy when it comes to non-competes. Judges are far more likely to be persuaded by a non-compete that is specific to the individual employee, rather than by a fill-in-the-blank agreement that’s been photocopied to death.
An individualized agreement, while more work for in-house counsel and human resources, is more persuasive if it specifically explains how the company would be harmed if this employee unfairly competed.
4. Trying to protect trade secrets that aren’t.
Courts will only enforce non-competes to protect a company’s customer goodwill, confidential business information, or trade secrets. But companies often overreach in identifying what their trade secrets really are. Customer lists are the most common offender, especially when a company proudly displays a list of its customers on its website.
Of course, there is no statutory list that tells you what is and isn’t a trade secret. Instead, the courts will decide whether certain information is a trade secret based on a number of factors: (1) how widely it is known outside the company; (2) how widely it’s known inside the company; (3) what measures the company has taken to guard its secrecy; (4) its economic value, both to the company and to its competitors; (5) how much money and effort went into gathering it; and (6) how hard it would it be for someone else to duplicate. See Jet-Spray Cooler, Inc. v. Crampton, 361 Mass. 835 (1972).
If the information your non-compete is seeking to protect doesn’t score well on this test, you may want to rethink using the non-compete.
5. No attorneys’ fees provision.
Non-compete cases can be very expensive to litigate. And unlike more traditional employment law cases, many of the litigation costs arise in the first month or two. To take some of the sting out of these legal fees, it is wise to include a clause that requires the employee to reimburse the company for attorneys’ fees spent to enforce the non-compete. While the courts might not always issue an attorneys’ fees award, you will never get your fees without this clause.
6. No choice-of-law clause.
So many companies today have offices in multiple states that choice-of-law issues often arise in non-compete matters. There is a broad spectrum of states’ willingness to enforce non-competes.
At one end, California famously rejects nearly all non-competes, while Florida at the other end presumptively enforces them. The New England states fall largely in the middle.
Where companies get into trouble is when they seek to enforce a non-compete written in, say, Massachusetts for an employee working in California. To have any chance of succeeding, the non-compete needs to have a solid choice-of-law clause mandating that Massachusetts law controls the enforcement of the agreement. Even then, a court will sometimes ignore a choice-of-law clause. Bottom line: carefully consider choice of law before you draft.
7. No assignment clause.
Oftentimes when companies change owners, some employees end up with the new companies. Are the non-competes they signed with their former employer still enforceable? Without a valid assignment clause, the courts tend to disfavor the assigning of non-competes to successor employers without the employee’s consent.
Most states consider non-competes to be personal-services contracts, and feel that an employee giving up the right to compete with her employer does not mean she should automatically be prevented from competing with the new company. Practice tip: Include a solid assignment clause, and discuss why it needs to be there.
Conclusion
Many non-compete lawsuits are lost in court because of the drafting mistakes described above. By paying attention to these issues at the drafting stage, in-house counsel can better assess whether it is worth going to court to enforce a particular non-compete, and can feel more confident that they will win their preliminary injunction.
Jay Shepherd is an employment attorney at Shepherd Law Group in Boston, a boutique firm specializing in trade secret and non-compete litigation and in defending businesses in employee lawsuits. Massachusetts Lawyers Weekly recently named him one of five “Up and Coming Lawyers in Massachusetts.” On Nov. 4, Jay will chair the Massachusetts Bar Association’s annual seminar on “Making and Breaking Non-competes.” For more information on non-competes, visit www.noncompetehelp.com. You can reach Jay at (617) 439-420, ext. 22.
