January 7, 2020
The law regarding agreements between an employer and employee not to compete, not to solicit employees or customers, and, not to disparage the employer is not complicated. Non-competition clauses are evaluated differently from “non-solicitation” and “non-disparagement” clauses. Therefore, this post will focus on the “non-competition” clause first and address the “non-solicitation” and “non-disparagement” clauses in a following post.
The Mississippi Supreme Court ruled a long time ago that restrictive covenants to not compete are “in restraint of trade and individual freedom and are not favorites of the law, but will be enforced when reasonable.” Additionally, the court determined that these covenants in restraint of trade must be strictly interpreted.
The first take-away from the law is that because the agreements are generally disfavored and strictly construed then drafting mistakes, ambiguity, or, unreasonable restrictions in the agreement ultimately result in the unenforceability of the restriction. With such scrutiny placed on the agreement, it was unwise for an employer to draft its own agreement. Lawyers and judges use their own language to some extent which then creates an expectation of what words, language and phrasing should be stated within the agreement. Failure to use precise or recognized language which meets a judge’s expectation is begging for a determination that the agreement is ambiguous and thus unenforceable. Another mistake I often see from an employer is using a prior employee’s agreement as a form for another employee or modifying an old agreement drafted by an attorney. These changes result in agreements that were not reasonable in scope to a particular employee because the agreement was not tailored to that employee’s competitive impact on the employer. Failure of the restriction to be reasonable in scope is the most often cited reason a court invalidates or limits the non-compete agreement.
The second take-away from the law is that when a court must decide any contest about what is reasonable, whether there are mistakes in drafting, or, any other contest to the agreement, the employer seeking enforcement bears the burden of proof. The employer is the party that must be prepared to show that not only are the restrictions reasonable, but also prove the valid business reason justifying enforcement of the non-compete clause. In a contest a court will look to confirm that the restriction is reasonable to protect a particular “economic interest” of the employer. The reality is that judges are loath to keep a person from having a job unless convinced true harm will come to the employer from the new, competitive employment. An employer must be ready to put on understandable evidence of the negative consequences the unfair competition will cause.
While the law is simple to understand, determining a “reasonable in scope” restriction is not always simple. A court’s initial review of reasonableness starts with “measuring how long in duration and how far in geographic scope is the employee restricted from competing.” Non-competition agreements are enforceable only “within such territory and during such time as may be reasonably necessary for the protection of the employer or principal, without imposing undue hardship on the employee or agent.” If the restrictions are for too long a time period or cover too large a geographic territory, then the court may reduce the scope of the restriction without totally invalidating it, or, invalidating the agreement altogether.
But simply drafting a “short” period of time or “small” geographic area of restriction for the sake of enforcement is misguided. The number of people working remotely with a computer and cell phone is growing. Their place of employment is not as important as the place of the employer’s economic interest within that employment. Globalization of commerce also means that the competitive work could be geographically located everywhere. The key to drafting a proper non-compete comes from matching the time and distance scope to the employer’s protectable economic interest. A long time and large scope which directly matches the employee’s ability to inflict economic harm upon the employer is more justifiable than an artificially short or small scope.
A mistake I have seen is when a lightly-seasoned employer, who learned along the way a court can reduce the scope of the agreement to make it more “reasonable”, drafts agreements broader in scope either with an eye toward anticipating the reduction or treating the initial draft like an opening offer. If the scope (time or distance) is slightly too broad, then the court will probably tailor the scope down. But agreements viewed as so big as to be capricious or in bad faith often result in total invalidity. The old saying, “pigs get fed, hogs get slaughtered” is applicable in this regard. It is my opinion that the better course is to get the agreement tailored tight and right on the front end and then defend its legitimate application without hesitation if contested. Making the scope too small or too big is asking for trouble.
Drafting the right agreement is important but so too is using the agreement properly to gain the needed protection. Employers must consider the facts and circumstances of the employee’s termination when evaluating how enforceable the non-compete will be if contested. Mississippi and Alabama are both employment at-will states. As long as an employment agreement does not alter this status, the employer can terminate employment for any reason. But as stated above, the judge, like any other person, is hesitant to stop a person from earning a living. If the employee’s termination is under questionable or doubtful reasons, then expect limited enforcement of the non-compete agreement. If the judge finds that the employee’s termination was arbitrary, capricious or in bad faith, the judge has the power to “lend the hand of equity” and refuse to enforce the agreement entirely. If the offense resulting in termination is not clear, or, if the employee signed the non-compete only to be terminated shortly thereafter, an employer should consider paying a lump sum to the departing employee to “insure” the non-compete’s enforcement.
Another reality is that an executive employee with experience and education is more easily restricted from competing than an hourly, blue-collar, working man. An employer faces an uphill fight against a terminated employee unable to find other work due to limited education and experience. The court has the power to do an “equitable balancing of the rights of the employer and the employee” to determine whether enforcement of the agreement has a more oppressive effect on the employee than non-enforcement has on the employer’s economic interests. Enforcing non-competition of a single, hourly worker is probably not going to happen under ordinary circumstances. Worse, once other hourly workers “learn” the non-compete is not enforceable, then more defections can ensue. When considering whether to seek enforcement of non-competition agreements against hourly-level employees, pick your battle carefully, such as when a group of employees make a concerted effort to leave together and compete.
One final issue for an employer to consider, which only rarely comes up, is that a court can also consider the rights of the public to have competition or the employee’s services in the marketplace. For example if the employee provides unique and important services (the only health care in a rural community), or, the loss of the services drive up prices in the market, a court can wipe out the non-compete in the name of the greater good for the consuming public. Employers occupying these fields should consider other arrangements like advanced compensation agreements or narrow-scope restrictions.
Is there value in having non-compete agreements with employees? Certainly. Each employer should ask itself, “Am I empowering this particular employee with knowledge, training or proprietary information that could harm me if it all goes to my competitor?” If yes, then consider a tailored agreement for each employee to protect against unfair competition. “An ounce of prevention is worth a pound of cure.” Paying an attorney to draft the agreement is not overly expensive. Most agreements can be done for an hour or two of the attorney’s time and the cost does not often exceed the economic harm a former employee can cause. Are the costs of enforcement a lot? The clearer and more tailored the agreement is, then the less chance the non-compete is contested in court and the cheaper the agreement is to enforce when contested. But enforcing a poorly written, generic, or non-tailored agreement can be expensive. Worse, if the contested agreement is found unenforceable, then costs spent were for nothing and the economic harm from the former employee is still forthcoming. A well drafted agreement includes recovering the costs and attorney fee for enforcement as well. This threat of payment alone makes it possible to stop the unfair competition from damaging your business from the outset.
Operating in business is difficult enough these days. Allowing runaway employees to sabotage the business after separation could be devastating. Take the preventive step early but also properly.
If you have any questions about how to enroll employees into a non-compete agreement, or, updating your current non-compete agreements, please let us know, https://hs-lawfirm.com/. We are always here to help Jackson County businesses accept challenges and deliver results.