Compete or Non-Compete, That is the Question!

Non-competition agreements nearly always, when carefully drafted, work in favor of the employer.

Most people believe the purpose of a non-competition agreement is to prevent an employer’s former employee from competing against them.  In fact, their purpose is not to prevent the employee from competing.  Their purpose is to protect the employer’s investment in:

• Trade secrets – Trade secrets are information and related materials which any employer develops, compiles or creates, usually at a significant expense, which often is crucial to one or more primary functions of the employer and the disclosure of which would result in the employer suffering significant damage, economic loss and legally, unfair competition.  In some instances, it is a crime to steal or misuse an employer’s confidential information (see Massachusetts General Law Chapter 266, Section 30(4)).  Additionally, the statutory law provides for stiff civil sanctions  (see Massachusetts General Law Chapter 90, Section 42).

Confidential Information – This is information which an employer compiles and which is not readily available to the public.  The employer usually spends significant funds to obtain and compile this information and should it fall into the wrong hands, would have devastating results for the employer.  This information often consists of customer lists, customer details and goods or services usage, pricing and the like. Goodwill – Goodwill is a businesses good reputation and good relations.  Customarily, companies and businesses spend countless Dollars on advertising, sales associates and customer service personnel to establish a readily identifiable name along with a positive reputation.  Through the use of Non-Competition Agreements, this investment may be lawfully protected. Unfortunately, for most, signing such an agreement can utterly obliterate their career path, should they be terminated or choose to quit a job with a signed non-compete.

Most Non-Competition Agreements provide that upon the employee leaving their present job, they are prevented from working in a similar industry to that of their former employer.

Non-competes usually specify the term of years and in a specified geographic area.  Sometimes, if an employer conducts their business nationwide, the geographic area can span the entire country. The Court requires that such terms be “reasonable” to suitably address the employer’s three legitimate needs as listed above.  However, there are few people who have the luxury of refraining from working for even one year or have the ability to simply up and move to a place not covered by their Non-Competition Agreement.

The moment a person signs a Non-Competition Agreement,” they are effectively at the mercy of their employer if they want to continue to work in their chosen profession or line of work.

A “Non-Competition Agreement” can be rendered void if the employer makes a major change to the terms of the employee’s employment that existed at the time that the agreement was made. For example, a drastic reduction in the employee’s salary.  This is provided that the employer did not place a clause in the original Non-Competition Agreement that such a change in the terms of employment does not void the same. Additionally, many an employee, who has worked for a term of years for an employer has, years post hiring, been presented with the choice of signing a Non-Competition Agreement or being immediately terminated.  The good news is that as of August10. 2018, when a new law takes effect, an employer may no longer do this without providing the employee with something of significant value in exchange for signing that agreement.  I will address this new law, below.

There is an agreement which provides excellent middle ground for both the employee and the employer.

It is known as a Non-Solicitation Agreement.  Customarily, Non-Solicitation Agreements simply bar the departing employee from soliciting for their business, their former employer’s present and former clientele-customers or from soliciting prospective clientele-customers that their former employer has marketed to.  Non-Solicitation Agreements are usually effective for a term of years as well, but the Courts will more liberally enforce them due to their limited terms.  Non-Solicitation Agreements do not destroy an employee’s career permitting the employee to continue to be employed in their profession provided they keep away from their former employers past, present and prospective clientele (that were actually directly marketed to).  Simultaneously, Non-Solicitation Agreements protect an employer’s legitimate interests, although not as fully as a Non-Competition Agreement.  Restrictive employment agreements such as Non-Competition Agreements are not permitted prevent “ordinary competition” and Non-Solicitation Agreements permit such competition.  However, most employers, will prefer to prevent “ordinary competition,” if they can, through Non-Competition Agreements.

Under the new law Massachusetts General Laws,

Chapter 149, Section 24L, effective on August 10, 2018, a Non-Competition Agreement cannot have a duration of more than 12 months (unless the employee violated certain duties during his employ) and must be limited to the geographic areas served by the employee during the last 2 years of their employ.  Also, an employee who is already employed, may not be forced to sign a Non-Competition Agreement without receiving significant compensation for the same.  Lastly, under the new law, if the employee is terminated or laid off without good or just cause, the Non-Competition Agreement will not be effective against them.  There are other more minor exceptions under the new law which are not discussed here.

Lastly, when an enforceable Non-Competition or Non-Solicitation Agreement is violated, the employer may sue the employee in Court and obtain an Injunction which is an order of the Court barring the employee from further violating the Agreement.  Should the employee violate such an order of the Court, the Court may hold them in contempt of court subjecting them to fines and in some instances, imprisonment.

It is important as employees, to bear in mind that both Non-Competition or Non-Solicitation Agreements are for the sole benefit of the employer.  For employees, Non-Competition Agreements are rarely acceptable or advisable even if means not being hired.  Non-Solicitation Agreements are far more reasonable for employees.   For employers, Non-Competition Agreements provide a greater benefit, but they are now more difficult to enforce and savvy employees are less willing to sign them.   Non-Solicitation Agreements often provide adequate protection for employers, but there can be instances in which a departing employee with knowledge of the former employer’s business, can constitute a threat in the open market with that caveat that “ordinary competition” cannot be the purpose of a Non-Competition Agreement.

If you have a question about signing or not signing a non-compete clause, or any sort of employee agreement – please CONTACT US for assistance. We have offices in Newton and Brockton, Massachusetts specializing in business law practices.