Litigation between employers and former employees over non-compete agreements and other forms of restrictive covenants is increasing.

In the past few years, employers have dramatically stepped up their use of non-compete agreements to limit what a departing employee can do.

“This is a hot area,” said Barbara Jean D’Aquilla, a lawyer in Minneapolis who recently spoke at an employment law seminar on the topic.

Many management-side firms have carved out practice groups dedicated to non-compete agreements.

“Ten years ago, this was only a small portion of my practice. Today it’s over 50 percent,” said Peter Steinmeyer, a Chicago management attorney and co-chair of Epstein, Becker & Green’s non-compete, unfair competition and trade secrets practice group, which was formed two years ago.

San Francisco lawyer Cliff Palefsky, who represents employees, said that “it used to be these agreements were reserved for the most senior executives. Now they are being used across the board. There are some companies where everyone has to sign one regardless of what position you are in.”

Palefsky said he has seen a twenty-fold increase in these cases over the past five years.

As more cases end up in court and the ranks of the unemployed increase, some attorneys say that courts are showing more empathy for employees.

“The tide is turning a little bit; I’ve seen a definite change of attitude from judges,” said Dan Frith, a Roanoke, Va., lawyer who has had success in knocking down non-competition agreements.

But Nancy Erika Smith, of Montclair, N.J., said she has not seen this happening in her practice representing employees.

“I have not seen a judge say, ‘Hey, this person needs to work,’” she said. “But I have seen companies agree to waive the non-compete agreement and pay less in severance.”

Growing, but gray, area

Management attorneys say non-compete agreements have gotten broader to reflect the current business environment.

“Today, an employer’s most valuable assets are their people and ideas. Thirty years ago, it was bricks and mortar,” Steinmeyer said.

The Internet has also added more risk.

“With a few key strokes, you can transfer documents, so the spread of technology has led to increased concerns about the theft of confidential information,” Steinmeyer said.

But plaintiffs’ attorneys say employers are going further than protecting trade secrets or confidential information.

Proprietary information can include sales and marketing strategies, client preferences and — under one theory called “inevitable disclosure” — everything in an employee’s head.
Frith, for example, represented a waiter at a steakhouse who signed a non-compete agreement barring him from working at any other steakhouse.

Even in California, which has a statute prohibiting non-compete agreements, employers are attempting to get around the law by drafting other types of restrictive covenants, such as non-solicitation agreements that prevent a departing employee from contacting former clients or employees, Palefsky said.

The law is “a very gray area in almost every jurisdiction,” Steinmeyer said.

However, there are some general trends in what courts are willing to uphold.

Wayne Outten, an employee-side attorney in New York, said non-solicitation agreements with employees are “readily enforceable.”

“They are very common these days and are easier to enforce because they do serve an important interest in protecting a company’s investment, and they don’t prevent a person from getting a job,” he said.

But he said that agreements requiring non-solicitation of clients are less likely to be upheld.
Steinmeyer said nearly every state has adopted the uniform trade secrets act, and courts treat the theft of trade secrets like the theft of any other property.

It is unclear, however, whether a former employee’s knowledge can be considered a trade secret or whether it is simply general knowledge acquired while doing his or her job, he added.

The possible duration of a non-compete agreement is also a gray area, but an acceptable length of time seems to be between one to two years, depending on the industry.

“Generally speaking, a reasonable time period is one or two years, maybe three, depending on the length of time the information remains confidential,” said Philip Eschels, a management attorney in Louisville, Ky.

He said in the technology field a shorter duration may be appropriate because of the rapid changes.

An issue that peeves employee-side attorneys is that many courts, rather than striking down an overly broad agreement, will re-write it more narrowly, also called “blue penciling.”
“If a court determines two years is too long, it will say, ‘Fine, I’ll fix it and make it a year long.’ [That] gives employers the incentive to write the biggest, ugliest clause in an oppressive fashion,” Palefsky said, noting that it can cost an employee $50,000 to $100,000 to defend an enforcement action against an employer.

Frith said in some cases he has brought a declaratory action to “move things on a quicker time table,” such as when an employee wants to know whether an agreement is valid before committing resources to opening a new business.

Race to the courthouse

Because state laws differ, many cases result in a race to the courthouse.

This issue came up recently in a case involving a vice president of storage at EMC Corp. in Massachusetts who was hired by Hewlett-Packard in California.

The employee filed suit in California, which prohibits non-compete agreements on the grounds that such contracts stifle competition. Meanwhile, the former employer sought to enforce the agreement in Massachusetts, which recognizes non-competes on the theory that businesses should be able to develop new products without fear of theft.

On May 4, a Massachusetts’ trial court enjoined the employee from starting with HP but later modified its ruling to prevent him only from working for HP’s storage unit.

On June 5, a California court declined to disturb the Massachusetts ruling.
To avoid these situations, some employers are including choice-of-law clauses in their restrictive covenants.

But D’Aquilla cautioned that some courts will not recognize such clauses. For example, in a case she handled involving a non-compete agreement between a Minnesota company and a sales rep hired in Georgia, a Georgia court refused to recognize a choice-of-law clause favoring Minnesota law.

Another area where courts will not necessarily uphold an agreement is when an employer contracts with an independent consulting firm, and the non-compete agreement runs only between the consulting firm and its own employees, D’Aquilla said.

“When an employee of that consulting firm leaves to go compete with the competitors of the employer, a court may not enforce it,” she said.