The Potential Pitfalls of Noncompete Agreements
Employers must consider a variety of factors to determine a potential candidate’s fit. Salary requirements, skill set and personality are, of course, all very important. But one under-appreciated factor to consider is whether your candidate has a noncompete agreement with a former employer. In 2016, the Obama administration estimated that 18 percent (30 million) of American workers were covered by noncompete agreements. Failing to account for this growing trend can lead to unanticipated headaches and unwelcome legal costs.
In general terms, noncompete agreements place limits on an employee’s ability to leave one employer to work for a competitor. They may be limited by geography or time, and several states have their own laws governing the permissible scope of such agreements. These scopes are often challenged after a former employee begins work for a competitor and the former employer seeks to enforce the noncompete agreement.
The former employee may attack the noncompete agreement by arguing, for example, that the time restriction on the noncompete is too long. Because courts place limits (which vary by jurisdiction) on the permissible breadth of noncompete agreements, a former employee who decides to challenge the noncompete agreement will at least have the opportunity to make a case in court, and possibly drag his or her new employer along for the ride. This, of course, leads to litigation costs.
Employers may try to cut down the potential for litigation by using vague language. Consider the following noncompete language and whether it is likely to hold up in court:
You agree not to become employed by a company which competes, directly or indirectly, with us for a reasonable period of time and reasonable geographic location.
This language may seem reasonable (after all, it uses the word “reasonable” twice). But this seemingly innocuous noncompete language would, if interpreted and enforced literally, prevent a former employee from working in any capacity—even as a janitor—for a competitor. A court may (and, in fact, some courts do) find this language impermissibly broad and will refuse to enforce it.
For instance, some states follow the aptly named “janitor rule” and will refuse to enforce a noncompete agreement in its entirety if it contains language like the above. Other states follow the “blue pencil rule,” meaning they’ll enforce the noncompete agreement to the extent that it is reasonable, but no further. Employers may wish to eliminate uncertainty by including choice-of-law provisions, but not all states view these provisions the same way. In short, the enforceability of noncompete agreements varies and can require a fact-dependent analysis and a state-by-state survey of the law, which, in turn, can lead to high legal costs.
But this only matters when employees leave a job, right? Why does this mater to hiring professionals? It matters because you’re not only getting an employee, but all of their baggage as well.
When an employer alleges a former employee has taken a new job in violation of a noncompete agreement, the employer will most likely sue not only the former employee, but may also elect to sue you, the new employer. Claims against a new employer can range from theft of trade secrets to tortious interference with contract, and can range from requests for injunctions to claims for monetary damages. Even if the new employer believes it did nothing wrong in hiring the employee, it still has to defend itself in the lawsuit. And that defense will of course lead to legal costs.
The prospect of heavy legal costs (to say nothing of potential monetary liability) means that recruiters need to be well advised on the existence of a noncompete agreement as a factor in considering a candidate for a position. Given this growing trend, the issue is an inevitability. If the potential employee has signed a noncompete agreement, he or she may still be the right candidate for the position. But rather than extending an offer and rolling the dice on a possible lawsuit, you should consider having experienced counsel review the noncompete agreement before an offer is extended to the candidate.
An attorney can check the language of the noncompete agreement with the law of the applicable jurisdiction and assess the potential litigation risks of hiring the candidate. You can then better evaluate the potential risks in hiring that individual with your eyes wide open. This small step will help your company prevent future legal headaches and bills, and allow you to focus on letting that new hire really pay off.
Thomas A. Muccifori is a partner at Archer & Greiner. Anthony M. Fassano is an associate at Archer & Greiner.