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Non-Compete Agreements: What Are They? Who Should Sign Them? Why Would You Use Them?

3.14.14

Restrictive covenant agreements have become a major feature of the business landscape in the United States. If you are a lawyer, then all you have to do is do a search for the term “non-compete” on Lexis or Westlaw and you can find tens of thousands of hits as the case law on these agreements proliferates. Or, if you are a layman with a functioning Internet connection, you can simply type the term “non-compete agreement” into Google and you will learn that the country’s most popular search engine has returned 10,400,000 results.

When I ran this search while writing this article, the first three results on Google are paid advertisements for free non-compete agreements. One such web site asks a series of questions and then spits out a draft agreement.

To see whether there was any legal substance to the site, I answered the questions so as to produce a five-year non-compete agreement interpreted under California law. The site then dutifully gave me just what I asked for, despite the fact that California has an almost-complete ban on non-compete agreements in the employment context.

This little exercise is useful to illustrate the first maxim of using non-compete agreements: Just because you draft it and an employee signs it doesn’t mean that a court will enforce it. In most contractual contexts, courts will not second-guess the deal struck by two parties.

However, there are exceptions to the rule of deference to contracting entities. One such instance is the signing of a non-compete agreement by an employee. Courts often pay attention to the disparity in bargaining power between an employer and employee, especially when an employee signs an agreement at the outset of employment, a time when everything appears to be rosy on the horizon. Few employees start a new position thinking about what is going to happen when the job ends, so courts will often intervene to save employees from their own willingness to cede too much in a restrictive covenant.

The way that courts address non-compete issues varies based on the jurisdiction, which illustrates the second maxim of using restrictive covenant agreements: State law variations are critical. Some states have outright prohibitions on the use of non-compete restrictions in the employment context. Some states allow judges to mark through offending paragraphs, but do not allow judges to modify or rewrite the restrictions. Some states allow judges to modify the provisions, but leave that right up the discretion of the court. And then some states require that judges modify restrictions to make them reasonable, so even if an employer shoots for the moon with a restriction, it can do so secure in the knowledge that a judge will have to bring the provision back to earth.

Thus, knowing the law of the state in which an employee will work and adapting the agreement to that state’s legal regime is vital. Additionally, some states have requirements that impact the process of having employees sign restrictive covenant agreements, so the process matters, as well as the substance.

For instance, there are a number of states that set forth that only certain categories or employees can sign restrictive covenants, or that some employees cannot be subject to non-compete paragraphs, although they can be subject to other restrictive covenants. This affects the procedural aspects of rolling out agreements. It also hits on a third maxim, which is that an employer needs to think through which employees should be signing particular agreements. For an employer in the hotel industry, there are a variety of options:

The key question for a hotel employer to pose to itself is “can this employee hurt my company if he/she moves to a competitor and, if so, how would he/she do so?” An honest answer to this question will be a useful guide in determining the particular covenants that should govern an employee’s conduct after the end of employment. An employer also needs to ask itself about the cultural effects of rolling out new agreements. Some companies have a tradition of using non-compete agreements such that employees are used to signing them; others do not have that tradition and therefore need to use care to avoid generating employee dissension.

There are a number of reasons why a hotel employer would choose to use restrictive covenants with its employees. The most obvious reasons are that these agreements can be used to protect the employer’s most critical information and relationships. However, there are other, less obvious benefits:

In closing, restrictive covenants can be a powerful tool for employers for a variety of reasons. However, as with most powerful tools, it is important for an employer to use these contracts responsibly. An employer needs to make sure that its agreements protect its interests in the least burdensome manner possible. Even the states that are pro-enforcement of restrictive covenants will look at this factor. An employer also needs to pay attention to state requirements for both the substance of the restrictions and the procedures by which they are signed. Lastly, an employer needs to think through the optics of the roll out so as to minimize the grumbling that can sometimes result from using restrictive covenants. An employer that pays attention to these factors will find itself in the best possible position to protect the relationships and information that form a large portion of the company’s list of assets.


This article by Michael Elkon was featured in Hotel Executive.

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