Non-Compete Clauses and Agreements (also known as Covenants Not to Compete), quite simply are agreements that are used to limit an employee’s competition against an employer when the employee is no longer working for the employer. They are necessary when an employee gains access to clients and in the due course of working for the client, gains certain relationships.
The fact of the matter is that they are some of the most misunderstood documents. Many employers and even attorneys still believe that a clause disallowing work “In the entire United States from termination date plus 10 years…” is a clause that will survive judicial scrutiny. It will not. Many others believe they are prima facie invalid from the start. In most states they are valid. What employers need is a narrowly crafted document that will still protect their business interest.
The Health Service of the Ozarks v. Copeland Case
Although it is a Missouri Supreme Court Case, The Health Services Case represents the current status of the law in many states. In this case, the court points out that it is the courts job to realize that non-compete agreements have their place. The employer has a legitimate interest in protecting his or her business from loss of customers and trade secrets and intellectual property, while the employee has a legitimate interest in earning a living and being able to transfer from one employer to the next in order to provide for his or her family. Second, a non-compete will be enforced if it is reasonable and no more restrictive than necessary in order to serve the interests of the employer.
Third, the non-compete must be narrowly tailored in time and geography. Fourth, the burden of proof is on the employer in these cases to prove the non-compete serves its legitimate interest and is reasonable in time and geography.
The Kennebrew Case
In the Kennebrew case, the Supreme Court of Missouri went into a little more detail concerning non-competes. Kennebrew had restrictions, namely a period of two years, all customers of the employer and prospective customers, and an employee non-solicitation clause for two years as well. The Supreme Court ruled that the existing customer requirement was overbroad because an existing customer could have included any customer in the United States. This clause was rewritten by the court to narrowly mean any customer that Kennebrew had contact with during the course of his employment. Secondly, any prospective customer could have included absolutely any business in the United States, this clause was deemed invalid.
Third, Missouri has a statute that is on point concerning employee solicitation being limited to one year as being presumptively reasonable. The Court remanded the case back to trial as triable issues remained open. The fact is that Courts can rewrite clauses to make them enforceable, strike clauses altogether, or remand issues back for trial.
Because of the personal computer, legal forms can be filled in and printed out in minutes. As a result, non-compete agreements have become somewhat common in recent employer-employee relationships. What does not come with them is an attorney to review the agreement and scrutinize whether the agreement does not go against public policy and the document is reasonable in duration and geography. In order to be effective, the document must be narrowly tailored, and in some states must meet additional requirements. The last thing you want is to go to court with a non-compete that says, in essence, “Everywhere and Forever” to face a judge.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors