Published on January 7th, 2012 by Alan L Sklover
“In great straits, when hope is small,
the boldest counsels are the safest.”
– Livy (Roman Historian, 59 BC – AD 17)
ACTUAL CASE HISTORY*: Morgan, 44, had worked in the office furnishings business for over 19 years. From his first, entry-level job as an office assistant shortly after college, over time Morgan had risen to become a leading wholesale distribution agent for a top-tier manufacturer.
Like many other industries, the office furnishings industry had gone through a considerable consolidation in recent years. Due primarily to repeated mergers and acquisitions, the industry came to be dominated by four large manufacturers. Morgan’s employer, one of those four major players, prided itself on its retention of top “talent.” By means of paying employees well – and by aggressively using and enforcing non-compete agreements – they had suffered few defections to competitors.
This last year had been a difficult year in the industry. Not only had large corporations cut back on refurbishing their offices, but layoffs and bankruptcies in many industries had resulted in corporate employers occupying diminished office space. Bonus expectations, industry-wide, were low. Unsolicited, Morgan received an invitation to interview with Private Equity investors interested in hiring an aggressive veteran to head up a mid-tier firm they hoped to one day take public. Particularly enticing to Morgan was a potential 10% ownership of the company. He was intrigued, and felt ready to make such a move – but for his non-compete.
Morgan’s non-compete agreement prohibited him from “directly or indirectly providing services to any company that was engaged in the office furnishings industry for 24 months after cessation of employment, regardless of the reason for departure.” He shared it with the Private Equity investors. There didn’t seem much way around it. To Morgan, and to his prospective employers, the non-compete seemed “air-tight,” and insurmountable. And, so, he contacted us for a consultation to consider the question “Any way around this?”
As is our custom, we asked Morgan lots and lots of questions about himself, about his work, about his employer, and about their business practices. In the process, we learned two things that interested us. For one, the company had recently lowered all executives’ salaries, including Morgan’s, even though his employment contract, which set his salary, still had one full year to run. Also, Morgan was aware that his superiors, on numerous occasions, engaged in an industry practice euphemistically called “gifting,” more commonly known as bribing clients’ representatives to get new business.
With that information in mind, we did three things for Morgan. First, we assisted Morgan in negotiating his new employment terms with the Private Equity investors. As part of those terms, we had them acknowledge his non-compete, and agree to pay his legal fees to fight it. Second, we prepared Court papers to file in Court just in case his employer found out what was in the works. Those Court papers cited both (a) the violation of Morgan’s employment contract, and (b) Morgan’s discomfort with the company’s practice of “gifting” that was deceptive and apparently fraudulent, to say the least. Third, we contacted Morgan’s employers, and showed them our drafted Court papers.
Their decision? Not to fight the matter, but rather to “walk away.” Though their non-compete seemed air tight and insurmountable, we found both (a) a legal defense, and (b) a practical defense, one or both of which surely worked to “Defeat the Non-Compete.”
LESSON TO LEARN: Non-compete agreements (and non-compete provisions found inside employment or other agreements) often appear to be impenetrable barriers to moving forward to a positive career opportunity. However, those of us who regularly go to battle over non-compete’s know that – more often than not – there exist good legal and practical defenses to them, and effective ways to negotiate to limit them, or get around them.
In fact, my experience over 30 years in this field has convinced me that most employers and their lawyers secretly worry that their employees may come to understand that very empowering truth: non-compete’s are defeatable. And, too, most Judges have no desire whatsoever to keep a person out of work without a darn good reason to do so. Though non-compete’s may seem to be impenetrable, the fact is often they turn out to be rather flimsy in their power over you.
Remember: If your employer is forced to back down, or your employer loses in Court, and its other employees find out, your employers’ non-compete agreements may frighten far fewer present employees into remaining with the company . . . Your former employer fears this, because this might just require your former employer to treat its employees better!
Remember: If your former employer’s clients, customers, suppliers, investors or prospective employees then find out – by public documents in a non-compete Court battle*** – that your employer engages in deceptive, dishonest, illegal, harassing, discriminatory or retaliatory behavior, those clients, customers, suppliers, investors and prospective employees may not want to affiliate with your former employer. Your former employer fears this, because this might just require your former employer to treat its clients, customers, suppliers, investors and prospective employees in more open, honest, legal and respectful ways.
Remember: If your former employer’s tax authorities or regulators find out – by public documents in a non-compete Court battle*** – that it engages in illegal activities, does not fulfill its legal obligations, or engages in tax evasion or other illegal practices, it may end up costing your former employer far more in the long run than it is worth to enforce your non-compete. Your former employer fears this, because it might just require it to make sure it acts in full compliance with all legal requirements.
But, first, you need to be aware of the most common defenses to non-competes, and how and when to raise those defenses. As you will see, some are factual, some are contractual, and some are otherwise legal in nature.
And, second, if you find one or two good defenses available to you, it is often best to be proactive and aggressive in using them by showing your employer they will likely lose such a battle, or if they do “win” the battle, they will more than likely “lose the larger war.” Said differently, there are good ways to convince your former employer that it is not in its best interests to try to enforce your non-compete.
WHAT YOU CAN DO: Consider whether one or more of these ten most common (a) factual, (b) contractual, and (c) legal defenses to a non-compete may be available to you. If so, your proactive presentation of them to your employer will likely be an effective way to defeat your non-compete, preferably without even getting to a Court battle:
1. Your intended new job may not, in fact, violate the precise terms of your non-compete agreement. – More often than you might believe, people do not carefully read over the precise words of their non-compete agreement, and don’t carefully consider whether it precludes their intended new job. Recently we won a non-compete battle because the agreement prohibited our client from working for an employer who used “the same or similar technology” as the former employer, and the new employer, in fact, did not do so. This potential defense cannot be overlooked, and it often is. Another non-compete battle we recently won involved a non-compete that said that our client, a saleswoman, could not sell to any of her employer’s customers. Problem was, she did not have a list of them, and the employer refused to give her one. Since it was impossible for her to know who she could not sell to, she was relieved of any obligation to do so.
2. The non-compete restriction may be too vague to be enforceable. – All too often, in a misguided attempt to provide wide-reaching protection, employers and their lawyers use language in non-compete agreements that is far too vague and too broad to be enforceable at all. Prohibitions against “selling advertising” or working “in the dental profession” are commonly found to be just too broad to enforce, and thus null and void.
3. “Unclean Hands” is a common and effective defense. – In order for an employer to ask a Court to Order an employee to act in good faith and honorably, the employer, itself, must first be doing so. If the employee departed from the company because of extreme harassment or blatant discrimination, the employer’s non-compete enforcement efforts will likely fail. And, too, if the employer was engaged in illegal or dishonest conduct, in which the employee did not want to participate, non-compete efforts for this reason will also likely fail. If the illegal or dishonest behavior was against clients, former employers are extremely reluctant to see such matters raised in publicly available Court papers.
4. An employer must have a “legitimate business interest” to enforce a non-compete. – The two recognized and accepted purposes of a non-compete agreement are (1) the protection of trade secrets, and (2) the protection of valuable business relations. So, why in the world would an employer need to keep a Janitor – or any other person who is no threat whatsoever to trade secrets or client relations – from working for a competitor? Non-compete’s cannot be used merely to punish or set an example without a true “legitimate business purpose” at risk. For this reason, too, an employer whose business is solely in communications cannot enforce a non-compete that prohibits a former employee from working for a company whose sole business is selling shoes.
5. Unreasonable Breadth as to (a) Time, (b) Geography or (c) Activities. – With a few exceptions, Courts will refuse to enforce non-compete’s that are plainly unreasonable in their restrictions. If the employer does business only in Duluth, Minnesota, a restriction on your working for a competitor “anywhere in the Western Hemisphere” will likely not pass judicial review. Likewise, no Judge will enforce a non-compete that is, by its terms, to last 10 years. The same goes for a prohibition against work for “any potential competitor,” as every business is a “potential competitor.” In these situations, however, a Court might be tempted to enforce such restrictions, but limit its enforcement to “within five miles of Duluth for a period of three months, and other employers in the same exact business.” This has historically been referred to as a Judge “blue-penciling” his or her enforcement Order.
6. Void as Against “Sound Public Policy.” – Sometimes the effect of a non-compete violates a broader social purpose. So, for example, if it can be shown that an employer uses a non-compete to maintain a monopoly in its business or trade, a Court will likely not enforce that non-compete. The same holds true if it can be shown that the non-compete requirement is only enforced against Hispanic employees, and thus serves to maintain a discriminatory practice.
7. Prior Employer Breach. – If an employer has previously breached an employment contract with the employee (as was true in Morgan’s case, above), or has violated an assurance to that employee, it cannot successfully argue to a Court that it has the right to demand that its former employee abide by his or her non-compete agreement.
8. Fraudulent Inducement. – I cannot count how many times I have heard a client say, “I was told that they would not enforce this if I left, so long as I did not go to a primary competitor,” or some variation of that. Another common example is this: “You must sign this in order to be eligible for a bonus,” and then you received no bonus. If you were tricked into signing your non-compete by some assurance or promise which does not appear to have been made in good faith, you may very well have a sound basis to defeat that non-compete.
9. Sometimes, if Terminated Without Cause, Especially if There is Evidence of Employer Bad Faith. – The law in most states is just not clear on the question “If an employee is terminated without ‘cause,’ is his or her non-compete enforceable?” Some Courts say “Yes,” while other Courts say “No.” Most importantly, though, most Courts will not enforce such a non-compete agreement if they feel the employer has acted in bad faith, and most will enforce it if the employee has acted in bad faith. Attorneys often battle to convince the Judge that it is their client who is “wearing the White Hat,” and the other side is “wearing a Black Hat.” (In cowboy movies of years ago, that is how you could tell the difference between the “Good Guy” and the “Bad Guy.”) It is for this reason that we strongly encourage our clients to avoid any appearance of impropriety, and to report to us any indications of impropriety by their employers.
10. Other Contractual and Factual Defenses. – A non-compete agreement is a kind of contract and, for this reason, is always subject to the many defenses to contracts available in the law, including the ones noted above, and these others: (a) The employer is simply in error on the facts: I am not violating the agreement; (b) I never signed it; (c) it is a forgery; (d) both sides were under a false impression, or made a material mistake, at the time the agreement was made (failure to read the agreement does not suffice); (e) I signed it under duress, such as blackmail (this is not commonly effective in non-compete’s); and (f) It requires me to do something that is illegal. The contract defense of “no consideration,” meaning that the employee did not get anything in return, is usually not available in non-compete matters, as most Courts say that the continuation of employment was, itself, sufficient “consideration.”
So, you may think, what do I do if I may have a valid defense or good argument against, my employer trying to enforce my non-compete? We usually suggest that the employee consider bringing the valid defense(s) and/or strong argument(s) to the attention of the employer (and the employer’s attorney, if his or her identity is known), and say, in effect, “Strong factual, contractual and legal bases exist such that this non-compete agreement is not enforceable, and I think that, if you go to Court, you should be honest with the Judge that you know about these defenses; otherwise you will be deceptive to the Court, something you really should not do.”
Such efforts are often effective. Nevertheless, should a Court battle ensue, you and your lawyer will be on firmer ground for having taken these steps in that (a) you have already assembled your factual and legal arguments, (b) you have shown by your actions that you are acting in good faith, and (c) you have added grounds to believe, and argue, that your former employer has acted in bad faith. Don’t forget the importance, as noted above, of wearing the “White Hat.”
***AN IMPORTANT LEGAL NOTE: It is a crime – extortion – to say, one way or the other, “If you don’t do as I say, I will expose you publicly.” It is not a crime, though, to say, “I have valid legal defense(s) to the non-compete, here they are, and if we go to Court, I will have no choice but to raise them in public Court documents.” If you fail to understand or appreciate the distinction between those two statements, and are not committed to acting consistently with that distinction, you would be well-advised to first consult with an attorney before proactively negotiating your non-compete.
We offer a 185-Point Master Guide and Checklist to Understanding, Negotiating and Defending Against Non-Compete’s. If you would like to obtain a copy, [click here].
We also offer Model Memos and Letters for Negotiating and Navigating Non-Compete’s in the ways we suggest above. To view our list, and obtain one or more, [click here].
To obtain our “Ultimate Package” of Non-Compete Materials, including all of our Checklists, Memos and Checklists, simply [click here].
SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and avoid risks at every point in your career. Knowing ways to lower and eliminate risks gives you a distinct advantage in navigating workplace life. Knowing ways to avoid and resolve disputes is even more advantageous. Learning the “in’s and out’s” of doing so is what we are here for. Now it’s up to you.
Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™is all about.
*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.
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© 2012, Alan L. SkloverAll Rights Reserved. Commercial Use Prohibited.