Litigation Over Non-Competes on the Rise

Rhode Island Lawyers Weekly - Sylvia Hsieh
June 22, 2009

Litigation between employers and former employees over non-compete agreements and other forms of restrictive covenants is increasing.

In the past few years, employers have dramatically stepped up their use of non-compete agreements to limit what a departing employee can do.

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As more cases end up in court and the ranks of the unemployed increase, some attorneys say that courts are showing more empathy for employees.

“The tide is turning a little bit; I’ve seen a definite change of attitude from judges,” said Dan Frith, a Roanoke, Va., lawyer who has had success in knocking down non-competition agreements.

But Nancy Erika Smith, of Montclair, N.J., said she has not seen this happening in her practice representing employees.

“I have not seen a judge say, ‘Hey, this person needs to work,'” she said. “But I have seen companies agree to waive the non-compete agreement and pay less in severance. ”

Growing, but gray, area

Management attorneys say non-compete agreements have gotten broader to reflect the current business environment.

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The Internet has also added more risk.

“With a few key strokes, you can transfer documents, so the spread of technology has led to increased concerns about the theft of confidential information,” Steinmeyer said.

But plaintiffs’ attorneys say employers are going further than protecting trade secrets or confidential information.

Proprietary information can include sales and marketing strategies, client preferences and under one theory called “inevitable disclosure”

everything in an employee’s head.

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Even in California, which has a statute prohibiting non-compete agreements, employers are attempting to get around the law by drafting other types of restrictive covenants, such as non-solicitation agreements that prevent a departing employee from contacting former clients or employees, Palefsky said.

The law is “a very grey area in almost every jurisdiction,” Steinmeyer said.

However, there are some general trends in what courts are willing to uphold.

Wayne Outten, an employee-side attorney in New York, said non-solicitation agreements with employees are “readily enforceable. ”

“They are very common these days and are easier to enforce because they do serve an important interest in protecting a company’s investment, and they don’t prevent a person from getting a job,” he said.

But he said that agreements requiring non-solicitation of clients are less likely to be upheld.

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The possible duration of a non-compete agreement is also a grey area, but an acceptable length of time seems to be between one to two years, depending on the industry.

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He said in the technology field a shorter duration may be appropriate because of the rapid changes.