How Far Can Companies Push the Boundaries of Non-Compete Agreements?

Most people have mixed feelings about non-compete agreements. On one hand, it conjures up images of a giant corporation trying to create a monopoly over its business and preventing former employees from rightfully exercising their skills after they leave. On the other hand, non-compete agreements protect the hard-earned labor of businesses and help them stay afloat, something we all need in this economy. Both of these positions have considerable weight in the legal world, and the law on non-compete agreements reflects this.

However, I’ve been noticing court decisions lately that have been very favorable in terms of enforcing non-compete agreements for businesses (see articles here and here). Now, keep in mind that the law on non-compete agreements varies by each state, so each court opinion on its own doesn’t count for much, unless you work in the state that court opinion was from. Furthermore, this is not to say that there haven’t been cases going the other way around – for example, California is infamous for strictly construing non-compete agreements. But regardless of which way your state leans, the recent cases enforcing non-compete agreements makes this an interesting issue for businesses in the process of drafting up their own. Below is a list of some results that have really pushed the boundaries of enforceable non-compete agreements:

1. It’s ok if you completely forget to write a non-compete agreement – the likelihood of damage is key!

Chris Boticcella was the VP of Operations at a giant baking company, which was owned by the maker of Thomas’ English Muffins. Because of his high-ranking position at the company, Boticcella was one of a select few who knew the recipe for these delightful English muffins. When Boticcella left the baking company, he decided to work for one of its top competitors. Naturally, his former employer was furious. The problem was, Boticcella had never signed a non-compete agreement with them.

It turns out, the Third Circuit (the court that presides over the states of Delaware, Pennsylvania, and New Jersey) decided that this omission was not a problem after all. The court found there was a substantial likelihood that Boticcella would use the top-secret recipe he had learned from his former job at his new job. This theory was substantiated by the finding that Boticcella had been acting suspiciously right before he left his former job. The verdict? Boticcella’s former employer was able to stop him from working for its competitor, despite the fact that Boticcella had never signed a non-compete agreement.

To me, this decision is truly groundbreaking because how often do you hear about a company forgetting to include a non-compete agreement, and the court letting this omission slide? It’s one thing for our legal system to be sympathetic to individual employees who get in trouble because they made a legal omission or error, but it’s another thing to find our courts being so sympathetic to big businesses for such logistical errors.

However, I think it’s noteworthy that this decision takes place in a court that encompasses Delaware, a state which is well-known to have laws extremely favorable for businesses. Furthermore, from a common sense perspective, this decision does make sense on some grounds. Even though the company acted rather foolishly, the court seemed like it was really trying to “do the right thing.” To me, this decision shows that it all goes back to the idea of asking why we enforce non-compete agreements in the first place. Despite the company’s folly, the court did protect the rightful property interests of the business when they found its rights to be in jeopardy.

2. Part of my non-compete agreement is not enforceable…can the rest still stand on its own?

If one part of your non-compete agreement is unenforceable, what about the rest? Can you just excise out the unenforceable part, and keep the rest of the agreement? The Wisconsin Supreme Court seems to have answered this question with a resounding YES.

What’s important in this case is that the non-compete agreement can be divisible, and that without the unenforceable clause, the non-compete agreement can still stand on its own. This means that the non-compete agreement needs to be written in separate paragraphs, and can’t contain any cross-references to the unenforceable parts.

To me, this situation is very similar to the one described above. This seems to be a case of a court finding that a non-compete agreement exists despite bad drafting or sloppy legal counsel. But as long as what is being enforced has a legitimate purpose to it, it seems like the court will protect the interests of the business.

3. Employees are prohibited from doing business with their former employers’ past customers.

In another win for companies, the Wisconsin Supreme Court said that a company can protect its interest in gaining renewed business from former customers. Thus, employees who leave a company are not allowed to work for competitors that curry to the past customers of the employee’s previous employer.

This is true especially in industries where companies and customers have relationships that typically last a long time and have taken a great deal of effort to cultivate. The company and its past customer may have just been taking a temporary break from each other, and could renew their relationship at any time. Furthermore, the employee is now certain to have top-secret information about his former company and its past customers that will now unfairly help him gain business from the past customers. Thus, an employee may not pursue business from customers who were past customers of his former employer.

Great for Businesses…

In my mind, these decisions, in the world of non-compete agreements, have been some of the most favorable ones for businesses. But as I mentioned earlier, I also want to add a word of caution that for every decision that is favorable for businesses, there is another decision out there that strikes down the enforceability of non-compete agreements. Additionally, even if you own a business in these states, it’s good not to take these as hard and fast rules. After reviewing the cases on this subject, and while the courts will never admit it, I believe that how sympathetically the individual facts in your situation work towards your favor, count for more than most people probably give courts credit for.