Reasonable and Effective Non-Compete Clauses from the Employer’s Perspective
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Specially trained employees are a valuable commodity in the business world, so keeping these skilled employees is of the utmost importance to employers. Many people have a skewed perspective of non-compete clauses as being unfair to the employee against whom it is being enforced. To address this sentiment, the Florida legislature has crafted Fla. Stat. §542.335 to ensure fairness to both the employee and the employer.
On the one hand, employers have a right to mandate restrictive covenants because they are entitled to reasonably protect their legitimate business interests and prevent unfair competition from former employees. On the other hand, employees agree to the covenants because in all likelihood they are receiving a good job that will lend experience and knowledge of important business information and possibly trade secrets. With this employment usually comes exposure to proprietary or confidential information through business operations or specialized training.
Protection of confidential client lists is the most frequent reason employers engage legal counsel for enforcement of non-compete contracts. Covenants not to compete should be viewed as reasonable because they are bound by the same rules as all other contracts.
Guidelines for Drafting Non-compete Clauses
In general, non-compete clauses should:
- Be signed by the employee;
- Have several restrictions to ensure they are not overbroad, or too burdensome in terms of reasonability in the length of time, the geographical area; and
- Restrict employment in only the exact field in which the employer conducts business.
Reasonable in Terms of Scope
According to Fla. Stat. §542.335, a reasonable length of time can range from six months to less than two years before becoming overly burdensome. The geographical limitation is subjective and based on the location and type of business the employer is conducting. For example, if the employer has a statewide business, it seems presumptively rational to allow the clause to extend to the entire state, but no further. If the company conducts business nationwide, the clause may be able to extend throughout the nation. All these factors are balanced and weighed with the public interest with the judicial perspective of deference so long as the covenant is reasonable.
Protecting Legitimate Business Interests
Next, the most important element of a non-compete clause is the employer proving the existence of at least one legitimate business interest. These legitimate business interests could include protecting:
- Trade secrets;
- Valuable confidential business information;
- Customer goodwill;
- Specialized training; and
Substantial relationships with prospective or existing customers, patients, or clients.
In order to prove such an interest exists and is the actual basis for the contract, a covenant not to compete should be written in the covenant to ensure there is a basis for enforcement and the rationale is clear. Generally, the higher up the employee is in the corporate structure the more likely the employee will be exposed to confidential information, and the more likely courts are to enforce the covenant. However, if the important interest is written into the contract and can be definitively proven, it will most likely be upheld even against rank-and-file employees. It should be understood by every employer that all standard legal and equitable defenses apply to non-compete clauses as with any other contract. However, the court may not consider economic or other hardship caused by enforcement of non-compete clauses.
Countervailing Public Policy Interests
An important consideration in evaluating a covenant not to compete is the public policy interests against restricting employment. The same covenant not to compete may be enforceable in one industry but unenforceable in another. For example, courts are more hesitant to restrict employment in the medical and legal fields than other fields because of public access concerns. See, e.g., Valley Med. Specialists v. Farber, 194 Ariz. 363, 982 P.2d 1277 (1999). Courts balance the employer’s interest in protecting its business against the public’s interest in continuing to see the same doctor or lawyer.
In order to ensure that defenses to the covenant are minimal, every employer should enforce the covenant uniformly against every employee. These clauses cannot be selectively enforced to be considered valid. Also, the employer must not materially breach any other terms of the contract, which could invalidate the entire contract. Conversely, the employer should include in the non-compete a provision stating that if the employee should materially breach the contract, then injunctive relief may be granted. In order to maximize the effectiveness of the clause, it should include a provision stating that an employee cannot work for a company that has any division or affiliate that competes with the employers’ company. Furthermore, it should include a provision that states if a termination of an employee is done in good faith by the employer then the contract is still enforceable on the date of termination.
If an employer follows these guidelines, the non-compete clause is likely enforceable. Once the employer establishes that the covenant is reasonable and follows all the statutory procedures, the burden then shifts to the employee to prove that the restraint is overbroad, overlong, or not reasonably related to protecting a legitimate business interest. In the event that a non-compete clause is unreasonable, a court will likely modify the agreement to make it reasonable as opposed to invalidating the entire clause. However, this should be avoided, if possible, because a court will most likely draft a provision that affords the employer with less protection if the employer tried to enforce a clause that was unreasonable.
If an employer does not feel comfortable requiring a non-compete clause from every employee, it should at least require a non-solicitation clause. This agreement prevents an employee that leaves the company from taking the best remaining employees, and customers, thus limiting “corporate raiding.”
The best approach for employers is to draft a non-compete clause that is reasonable on the front end to avoid being judicially mandated to enforce a clause that provides the company with less safeguards. Identifying legitimate business interests before drafting a covenant not to compete helps an employer focus on what it truly must protect. Reviewing all employment agreements frequently is the best way to prevent litigation and protect the employer’s business.
Sources reference: Fla. Stat. §542.335; NON-COMPETE AGREEMENTS: EMERGING ISSUES FROM THE PERSPECTIVE OF EMPLOYEE’S COUNSEL Wayne N. Outten, Anne Golden , Nantiya Ruan