Using a broad brush to draft noncompete agreements that are applied universally to a company’s workforce is increasingly coming under fire. And this exposes companies to unnecessary litigation risks, as well as legal fees associated with enforcement costs.
Employer Abuse of Noncompete Restrictions
A recent example of involves Law360 and its settlement with the New York Attorney General’s office over the enforcement of the company’s noncompete restrictions.
A journalist was working for Law360 out of college. She, however, later resigned to accept a job offer from the global news company Reuters. But shortly after starting, she was let ago after her new employer was threatened with litigation to enforce the noncompete restriction.
The New York Attorney General’s office announced that it had reached a legal settlement with Law360 as to the use of its noncompete restrictions. Under that settlement, Law360 is required to stop using noncompete agreements like the one it imposed on the journalist. In a harshly worded statement, Schneiderman explained:
Unless an individual has highly unique skills or access to trade secrets, noncompete clauses have no place in a workers employment contract. Unscrupulous noncompete agreements not only threaten workers seeking to change jobs, they also serve as avail threat… Workers… should be able to change jobs in advance their careers without fear of being sued by their prior employer.
Noncompete Agreements Have a Legitimate Purpose in Business
Our law firm routinely advises companies about the use and enforcement of noncompete agreements. And despite the harsh words by the New York Attorney General concerning noncompete agreements, they have a legitimate purpose and business if drafted and applied appropriately. Based on this experience, here are four problem areas that both employers and employees need to understand:
First, relying on overly broad, one-size-fits-all noncompete restrictions are a mistake for any business. Consider one of the most egregious examples of a company’s wrong-headed use of noncompete restrictions. Jimmy John’s required its sandwich makers and delivery drivers – often “kids” in or right out of high school – to sign broad noncompete restrictions. See Jimmy John’s Sued (Again) Over its Noncompete Restrictions. Jimmy John’s was the subject of a media firestorm and multiple lawsuits over its use of an overly broad noncompete agreements for entry level positions. Bad publicity, lawsuits, and legal fees are never good for business. And for what; Jimmy John’s responded to the lawsuits by taking the position that it “would never enforce a noncompete agreement against our employee that might’ve signed one.” So why have them in the first place?
Second, many businesses or the attorneys advising them lose sight of the fundamental requirement for having an enforceable noncompete agreement – it must protect a legitimate business interest. Merely protecting against or limiting competition is not a legitimate interest. Going back to the Jimmy John’s example, what sort of trade secrets or proprietary information is a sandwich maker or delivery driver going to have access to that would warrant a two-year post-employment restriction?
Yet Christopher Trebilcock, of Miller, Canfield, Paddock and Stone PLC, a large Detroit law firm, saw nothing wrong with the manner in which Jimmy John’s required entry level employees to agree to its post-employment restrictions (the restrictions Jimmy John’s decided to abandon):
… Jimmy John’s noncompete is a legitimate way for the company to protect its proprietary information. ‘A janitor, for example, can cause just as much trouble as a CEO because they have access to information — there could be documents with sensitive material on desks or in the trash.
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You can likely show the noncompete is reasonable in scope and duration.
Third and building on the above point, companies and their attorneys will aggressively seek to enforce what may amount to an unenforceable noncompete restriction. Such frivolous litigation imposes legal fees on both parties and ties up precious court resources. But in our experience defending former employees against noncompete enforcement actions, individuals are almost always at a financial disadvantage.
They may also be at a legal disadvantage if judges – looking only to clear their dockets – just enforce a restriction as written without inquiring about or requiring the former employer to carry its burden of proof that the restriction protects a reasonable competitive interest.
Fourth, a “one-size-fits-all” approach to noncompete agreements is not practical or cost effective. Specifically, companies do not have the time or money to pursue an enforcement action every time its noncompete agreement is breached – including by sandwhich makers or other entry level employees.
For this reason, we routinely take a more reasoned analysis in working with employers implementing noncompete agreements within its workforce. The goal here is to identify what information truly gives the company a competitive advantage, who has and or should have access to such information, and how to best protect those advantages from misuse.
For More information about this article or Michigan noncompete law, contact attorney Jason Shinn. Mr. Shinn routinely represents individuals and companies when it comes to drafting, negotiating, and enforcement of noncompete agreements.