Non-Compete: How Much Is Too Much?

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Courts and legislatures are increasingly taking a more skeptical look at non-compete agreements.  Agreements that likely would have been routinely enforced in the past are coming under close scrutiny.  As a result, employers are well advised to review their non-compete agreements to see if they are likely to be enforced in this new legal environment.

Ineo, LLC v. Lenehan, a Superior Court case in Connecticut, provides a prime example.  The employer was in the mobility and relocation industry. It provided software tracking and other tools and services to large international corporations in connection with the movement and relocation of senior executives in the United States and throughout the world.  The employer developed software that tracks on a global basis the accounting, expense and tax implications of employee relocation, enabling the executive and the employer to determine the comparability of benefits and costs. The software was proprietary and confidential.

The mobility and relocation industry is highly competitive with many companies having their own proprietary software.  And the pace of change in the industry is rapid.  Witnesses in the trial testified that the business changes every day and is constantly evolving.

The employee, a college graduate with more than twenty years in the industry when she was hired, was well compensated.  Although the employee was not an engineer and did not know how to write code, she worked closely with the employer’s coders to develop and improve the software. As a senior executive, she also had unlimited access to the employer’s confidential information.

As part of her employment package, the employee signed a non-compete agreement that among other things prohibited her from engaging in any “competitive business activity” or performing work or services for “any competitor” in any place in the world, while employed and for one year afterwards.

After working for two years in Connecticut, the employee accepted a position with a competitor in Colorado.  The employer, concerned that the employee, who had access to its confidential information, was joining a company that competes with it every day, sued to enforce the non-compete. The employee did not object to the antipiracy, anti-solicitation or anti-sales provisions. She conceded the enforceability of prohibitions against her soliciting or selling to the employer’s customers. But she did object to the non-compete provisions, arguing that they were overbroad and, therefore, unenforceable.

The court was untroubled by either the time restriction – one year – or the geographic restriction – the world. It concluded that one year was reasonable and given the nature of the industry and the employer’s role in it, providing world- wide services, the geographic restriction was likewise reasonable.

But the court was troubled by the non-compete’s impact on the employee’s ability to earn a living.  Prohibiting her from engaging in any “competitive business activity” or performing work or services for “any competitor” would effectively force her out of an industry in which she had worked her entire adult life.  The court held that a non-compete cannot be used to deprive an employee of her livelihood. 

The employer in drafting a non-compete to cover every conceivable threat to its business by prohibiting any “competitive activity” or working for “any competitor” wound up with an unenforceable non-compete.

To increase the probability of enforcement, employers should tailor the non-compete to the economic threat an employee would pose. Note the employee conceded that solicitation and sales of the employer’s customers was enforceable. Over reaching in non-competes, at least in Connecticut, increases the probability that they will not be enforced.

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