Andrea* is a software engineer in the financial services
sector who writes code for traders at sophisticated financial
institutions. She was recruited for a position with a large,
well-known hedge fund manager that she was keenly interested
in joining. The work for the firm was going to be challenging,
compensation was good for the industry and the bonus potential
Andrea and her employer tentatively agreed on the terms of
her employment and the firm's attorneys prepared an employment
contract for her to sign. There were a number of clauses in
the contract that concerned Andrea, particularly the one that
would prevent her from performing computer programming
services for any financial services company for the 12 month
period following her termination (regardless of whether she or
the firm terminated her employment).
There was no guaranteed severance package built into the
contract and she was not being employed in an executive
capacity. Andrea didn't need a law degree to figure out that
the restrictions in the agreement were aggressive, and she had
significant concerns about her professional marketability if
she ever left the firm.
While Andrea's concerns are understandable, as the owner of
two businesses, there are few things more frustrating than
spending time, energy and money to train and develop an
employee, only to have them go to work for a competitor before
you reap the full reward of your investment.
If that employee also tries to steal your clients, it's
like throwing salt on a "professional" wound.
This experience is certainly not unique to me, it's
something every employer goes through. Nevertheless, after
this happens to you one or two times, you start to think about
ways to contract your way out of this problem through
non-compete agreements with employees. In my law practice,
this is a frequent topic of conversation when counseling
In business, these two divergent viewpoints are difficult
to balance. On the one hand, an employer has a legitimate
interest in preventing employees from misappropriating their
business assets and giving a competitor an unfair advantage.
On the other hand, employees have a material interest in their
professional mobility and marketability.
Employers, who generally have superior bargaining power
over employees, typically try to protect their business assets
by having employees enter into agreements not to compete. In a
typical agreement, an employee is precluded from working in a
particular industry or for a competitor for a specified period
And while an employer has considerable leverage in terms of
getting an employee to enter into an agreement not to compete,
it's quite another feat to enforce it. This is where courts
step in on the side of the employee.
Courts have a duty to protect the public interest in
maintaining free and fair competition and in fostering a
marketplace that encourages new ventures and innovation. To do
so, courts place a heavy burden on employers when it comes to
enforcing non-compete agreements.
Nevertheless, in most states, an employer can enforce an
agreement not to compete if it can demonstrate a legitimate
commercial reason for the agreement and it can ensure that the
agreement is not a naked attempt to restrict free competition.
Courts generally accept two primary interests as "legitimate
justifications" for non-compete agreements: protecting the
employer's good will with customers and protecting trade
To make a non-compete stick, an employer needs to make sure
that the restrictions are not greater than what it reasonably
needs to protect the company's legitimate interests. According
to employment lawyer Edward Hernstadt of the New York firm
Hernstadt Atlas LLP, "non-compete agreements can be difficult to
enforce because each situation is very fact-specific." This is
particularly true in states like New York that have an "at
will" employment doctrine (employees can be fired for any
reason or for no reason, and at any time). Says Hernstadt,
"non-competes run counter to the spirit of the at will doctrine and, as
a matter of public policy, courts are cautious in enforcing them."
If you want to use non-compete agreements to help protect
your company's assets, here are some general guidelines that
you should take into consideration:
Limit restrictions to personnel with special
skills. Generally, we're talking about executive
employees and employees with technical skills that are so
specialized, it would take the Company a very long time to
replace the employee, would give the employee a unique
competitive advantage over their former employer and the loss
of the employee would cause the company irreparable harm.
General skills brought to the job or acquired on the job are
not protected by non-compete agreements. Also, an employee who
is merely good at their job, for example, a superstar
salesperson, the loss of which would reduce a company's
overall sales revenue, is not considered enough of a
specialized skill to justify the enforcement of a non-compete
Limit the restrictive time period.
Agreements with open ended time restrictions will never be
enforceable, neither will those with unreasonable time
restrictions. The less time an employee is restricted, the
greater likelihood the agreement will be enforced. Figure
between six and 12 months on average, 18 months at the outset
if there are other mitigating factors. Balance the time
restriction based on the experience of the employee. Use
smaller time restrictions, like six months or less, for
lower-level or lower-skilled employees.
Limit the post-employment restricted
activities. The more specific you can be about the
activities you want to restrict an employee from engaging in
after they leave, the more likely the non-compete agreement
will hold up. For example, there was case in New York where an
oral surgeon signed a non-compete with his employer. The court
determined that while the non-compete would be enforceable
with respect to physician's practice of oral surgery, a
specialized skill, it did not preclude him from practicing
general dentistry. In most cases, restrictive agreements that
prevent an employee from going to work for a competitor in any
capacity will not be enforced.
Be specific about the customers you are trying to
protect. Preventing former employees from stealing
customers is a legitimate concern for any business. However,
if your customer or lead lists can be readily obtained from
outside sources, restrictions on their use by former employees
will not generally be enforced. For example, if your business
serves trucking companies in New York City, a restriction on
the use of your customer list may not be as enforceable as the
same restriction for a company that refurbishes fine art for
wealthy collectors, who tend to be extremely private and who
are acquired only by referral. Even if your customer base
cannot be readily acquired from outside sources, you'll have
better success enforcing a non-compete if you limit the
restriction to customers with whom the employee has direct
contact through the course of his or her employment.
Identify Trade Secrets in Writing. If your
goal in using a non-compete agreement is to protect trade
secrets, it's best to list the secrets as part of the
agreement. This can be done in a schedule to the agreement and
should be updated regularly. The list puts the employee on
notice about what they cannot take with them to their next
employer, and provides greater specificity for courts in the
event you need to enforce it down the road.
Limit Geographic Area. Agreements not to
compete must be restricted by geography. However, the level of
restriction will be different depending of your industry. For
example, a restriction not to compete within a 25-mile radius
from a company's main office may provide an employer of a
physician enough protection from losing clients, but it may
not be sufficient for a software company whose programmers can
work remotely from anywhere with an Internet connection. In
this case, a geographic area of the continental United States
could be enforced. However, in cases where a business requires
a larger geographic restriction, serious consideration should
be given to reducing the time period of the restriction. In
the case of the physician, a one-year ban on competition may
be enforceable, where a three to six month ban for the
software engineer would be more appropriate.
Write in a "Blue Pencil" Clause. In some
states, courts have the ability to amend an overbroad
non-compete agreement in order to make it enforceable. This is
a practice know as "blue penciling" a contract. Courts do like
to rewrite contracts that will impose more restrictive terms
on an employee than what they originally agreed to. It may,
however, amend an overly broad clause, like reduce a time
restriction from 12 months to six months, in lieu of voiding
the entire agreement. Consider adding a clause in your agreements that gives the court permission to amend overly broad terms in
order to make the entire agreement enforceable. Of course,
this does not guarantee that a court will utilize its blue
pencil rights in your situation, but it does put an employer
in a better position overall.
Offer compensation for the non-compete. If
you feel a non-compete is critically important for the
survival of your business and you require a longer time period
or broader restrictions than what is normally enforceable,
additional compensation can mitigate an overly broad
restriction. For example, broad restrictive agreements entered
into between the seller and buyer of a business often receive
greater latitude by courts because of the additional
consideration paid in connection with the sale of the
business. Another example would be where there is a large,
guaranteed severance package that reasonably covers the
employee's salary during the restriction period. Says
Hernstadt, "if an employer is willing to let the employee get
paid while sitting on the bench, courts are more comfortable with
enforcing restrictive agreements."
The Deep Pocket
It's no secret that in litigation, the prevailing party is
frequently not the one with the best argument, but the party
who has the deepest pockets to sustain the expense of trial.
Many employers use this leverage over employees when drafting
agreements not to compete, relying on the assumption that most
employees will not have the resources to dispute their attempt
to enforce the restriction. Often times, employees abide by
the non-compete even though it wouldn't necessarily be
enforceable in court.
In Andrea's case, this appears to be her future employer's
strategy. A hedge fund manager with billions of dollars under
management is not likely concerned about the expense of a
trial to enforce a software engineer's non-compete
According to Hernstadt, the problem with this strategy is
where an employee joins a company that has even deeper pockets
and the fight in court gets prolonged. If an employer loses
their attempt to enforce a non-compete agreement, not only
have they paid significant legal fees in a losing battle, but all other employees and former
employees of the company will now have precedent to
demonstrate the invalidity of their restrictive agreements.
The company can work to get existing employees to sign a
revised agreement that is less restrictive, but it may have
big problems with respect to recently terminated employees
subjected to the voided agreement.
Enforcing a Violated
If you suspect a former employee is violating the terms of
a non-compete agreement, swift action is necessary to prevent
See the Quick Tip for a summary of the measures a
company would typically take.
When it comes to enforcing agreements not to compete,
Hernstadt tries to get his clients to focus on their goals.
"On the one hand, you want to stop your former employee from
stealing clients and show other employees that you are serious
about protecting businesses assets. On the other hand, by
taking too aggressive an approach, you may risk sending a message to
your clients or industry that you are difficult to deal with,
damaging your reputation."
In 2005, Microsoft sought to enforce a non-compete signed
by one of their executive level employees who left to join
Google. Microsoft CEO, Steve Ballmer, wanted to make an
example of the employee to scare other Microsoft employees
into remaining at the company. In the end, the executive was
restricted from performing certain tasks at Google, but was
not precluded from working there. Both Google and Microsoft
Says Hernstadt, "the process of enforcing a non-compete can
get expensive. If there's a way to reach a middle ground
quickly, both the employer and the employee end up with a
As for Andrea, the financial reward that the hedge fund
manager presented far outweighed the prospect of being out of
work for 12 months if she was terminated from her position.
She ultimately accepted the job and hopes that the restrictive
agreement doesn't ever become an issue. Nevertheless, she took
comfort in the fact that the non-compete agreement would not
likely be enforceable if ever challenged in court.