Tips for Employers Considering Use of Non-Compete Clauses

While many employers routinely include post-termination restrictions on employment in their written employment agreements, Virginia’s courts have historically treated non-compete clauses as restraints of trade.  For this reason, they begin with a presumption of unenforceability.  But that presumption can be overcome, and the non-compete enforced, if the employer can demonstrate that its particular clause was “narrowly drawn to protect the employer’s legitimate business interest… not unduly burdensome on the employee’s ability to earn a living, and … not against public policy.”

The mistake many businesses make is in assuming that non-compete agreements will be enforced as easily as other written contracts.  This leads them to use the agreements not in a targeted manner, but as a thoughtless matter of routine.  Worse, we find that many employers download forms off the internet, or copy clauses from agreements they have seen in the past, without ever considering whether the clause they are using will pass muster with a judge reviewing their individual situation.

The effective use of a non-compete agreement requires careful, advance review of each employment relationship, and tailoring of the clause to the individual situation.  No employer should expect to prevail in a non-compete dispute if this step is skipped.  To have an agreement enforced, participation by the business’s attorney in the process of reflection and drafting is essential.

Your attorney will lead you through these three key criteria for determining whether a non-compete can or should be used, and if so, how it should be crafted:

1. Use Non-Competes Only When Necessary to Protect Your Business Interests

Employers should resist the urge to include non-compete clauses in written agreements with all their employees.  These provisions should be implemented only for a limited number of key personnel.  By narrowing the use of these agreements, you will be better able to use resources to tailor these agreements to each key employee. By tailoring each non-compete, you will increase the odds that your agreements will ultimately be upheld in court, if challenged by your employees.

When facing a challenge, there is tremendous value in being able to express to the Court that the agreements are only being used for employees where it is essential to your business’s well-being. This reality will assist your counsel in persuading the court that the restraints are reasonable, and no more restrictive than necessary to protect your legitimate businesses interests.  As one example, a sales representative who gains knowledge of internal costs and pricing structures, customer lists and contacts, and other proprietary information critical to the business’s survival, may well need to be restricted from moving on to a competitor, given the threat that would be faced if the competitor learned that information.  But restricting the receptionist is unnecessary, even foolhardy.

2. Don’t be Penny Wise, Pound Foolish

Though any factors found relevant may be considered, traditionally, courts will scrutinize non-competes for three key characteristics:

• Their scope (what activities are prohibited after termination of employment);
• Their duration (how long the prohibition will remain in effect); and
• Their reach (how the geographic territory in which the prohibition is effective compares to the employer’s needs).

In some states, courts will consider responding to a clause found to have exceeded the permissible limits of applicability by “blue penciling” it, that is, editing it down to a level deemed acceptable.  Virginia’s courts have absolutely refused to engage in “blue penciling,” instead positing the issue as whether the clause is or is not enforceable, in an “all or nothing” approach.  Thus, to end up with a clause that will actually be enforced, the reflexive impulse to prohibit everything, everywhere, forever, must be resisted.

Again, the best practice is to have non-compete clauses drafted and tailored for each employee by an attorney.  While enforceability can never be guaranteed, a lawyer’s involvement will help assure that your business’s interests are protected as fully as the law allows, and that overreaching does not jeopardize the protections you truly need.  Periodic review and revision of any non-compete agreements is also advisable.  If the costs this would entail are considered too high to be justified, then this is an indication that applying post-termination restrictions to a particular employee may not be so critical after all.

3. Only Seek the Protections you Absolutely Need

As discussed above, the trial courts look to the scope, duration and reach of a non-compete to determine whether it is narrowly tailored and not more restrictive than necessary. As the law evolves, these standards will continue evolve.  Your non-complete therefore should be as limited as possible. Simply stated, only seek the protections you absolutely need to protect your business.  This may even involve taking a wholly different approach.  For example, instead of limiting where an employee may work after termination, consider simply restricting the retention or use of proprietary or other confidential information, or the solicitation of other employees or existing customers.  Those types of clauses are routinely enforced, and often deliver all that the employer truly needs without the high risk of losing in court.  And when enforceability is made more clear, the odds of avoiding litigation entirely are enhanced.  Fewer employees challenge non-solicitation clauses than non-compete clauses, because their lawyers tell them that success is less likely.

In sum, when the urge to use a non-compete strikes, consult with your attorney.  Consider other alternatives, as they may be less expensive, more effective, and more enforceable.  If a true non-compete agreement is truly necessary, though, be aware of the rules applicable, so that in the end, you get rights that are not merely “on paper,” but actually enforceable in court if need be.