Canadian businessman Kevin O’Leary, now made famous by the TV show “Shark Tank,” once said: “Business is war. I go out there, I want to kill the competitors. I want to make their lives miserable. I want to steal their market share. I want them to fear me and I want everyone on my team thinking we’re going to win.” (He sounds a little like Al Capone in “The Untouchables.”)
I don’t know how many businesspeople share Mr. O’Leary’s worldview. If you view business as war, however (and I really hope you don’t), then it becomes important to deal harshly with “traitors.” One way to do that is by doing everything possible to keep them from earning a living. Fortunately for unhappy employees who switch jobs, courts disfavor such efforts when they don’t serve a legitimate and fair business purpose. The counterbalance to that: If management spends time and money training employees in company systems and giving them access to confidential customer information, management has a legitimate in preventing them from running off and using their new knowledge to compete with the company.
In general, to be enforceable, a noncompete must be supported by adequate consideration, and must be reasonably limited in both time and territory. With that in mind, let’s take a look at a couple of recent cases on the topic that didn’t go so well for management.
The first case, Quicken Loan, Inc. v. Beale, comes from an Arizona appeals court. Quicken is an online mortgage company. As a condition of employment at Quicken, all employees signed a covenant not to compete, and a covenant not to raid Quicken’s employees. These provisions prohibited departing employees from communicating with current Quicken employees for two years. The provisions also prohibited employees from communicating with any former employees of Quicken for twelve months after the former employees’ employment terminated. When a group of employees left Quicken to go to work for a competitor, Quicken brought suit based upon the noncompete, and the employees argued that the covenants were unreasonable and unenforceable.
The Court agreed with the employees and refused to enforce the provisions, writing: “We find the Provision’s two-year time period is unreasonable because it is not an attempt to protect Quicken Loans’ proprietary information, it is an attempt, rather, to preclude Employees from using the skills and knowledge learned at Quicken Loans about the mortgage industry. Although longer provisions have been approved, these longer provisions are generally limited to situations where the restrictive covenant was designed to protect proprietary or confidential information the employee learned in the course of employment about the employer or its customers but it cannot ‘prohibit the employee from using general knowledge or skill.’” The court also invalidated the prohibition against speaking with Quicken employees, writing that such a restriction “attempts to limit current and former employees from discussing employment that is not mortgage-related.”
In another recent case, Socko v. Mid-Atlantic Systems of CPA, a Pennsylvania Court addressed the question of whether a noncompetition agreement could be imposed on existing employees. Mid-Atlantic is a basement waterproofing company, and hired a salesman who, after working for the company for some time, signed an employment contract containing a two-year covenant not to compete. He later resigned and took a position with a competitor, and litigation followed.
The Court noted that covenants not to compete are disfavored because they “are in restraint of trade and may work significant hardships on employees agreeing to them.” Then the Court ruled for the salesman, writing: “For a restrictive covenant to be enforceable, the employee must receive actual valuable consideration in exchange for signing an employment agreement containing one. When the restrictive covenant is contained in the initial contract of employment, the consideration is the job itself. But when the restrictive covenant is added to an existing employment relationship, however, to restrict himself the employee must receive a corresponding benefit for change in job status.” (Emphasis ours.)
I’m not sure what would prevent an employer from firing an employee, and then immediately rehiring him or her subject to a noncompetition agreement, but there you have it.
Bottom line: Noncompetition agreements are here to stay. From the management perspective, their enforceability will depend upon whether the restrictions are “reasonable” in the Court’s view, a standard that’s more likely to be met when the employee has been exposed to sensitive and proprietary information, and the restrictions are limited in time and scope. And employees should keep in mind that unreasonable non-competes have been, and will continue to be, successfully challenged.
- Gene Killian