The use of employee covenants not to compete – once restricted to salespeople and high-level management – has continued to expand into the ranks of ordinary employees. A recent survey suggests that as many as one in five employees have some form of agreement placing restrictions on their post-employment activities.
The growing prevalence of such agreements – and their potential restraint on job mobility and economic growth – has led many states to enact laws or propose legislation that would limit or restrict their use. No such laws currently exist in Delaware, but its courts have developed a “reasonableness” test to determine whether covenants not to compete will be enforced. This test includes whether the restrictions are narrowly tailored to protect some legitimate economic interest, the scope of the restrictions, the former employee’s need to earn a living, and the public’s interest in having open competition in the marketplace.
The broader use of covenants not to compete has also led to more lawsuits. Frequently, these lawsuits are brought not only against the former employee, but against the new employer as well. Such claims typically allege that the new employer hired the employee despite its knowledge of the noncompete and/or allowed or encouraged the employee to disclose and use the former employer’s trade secrets.
Given the significant legal costs and potential liability, all businesses should consider implementing the following steps before recruiting and retaining a new hire prospect.
Due Diligence in the Application Stage
The recruitment process should include questions about the employee’s previous employers and whether the employee is (or was) subject to any agreements, letters, or policies that placed restrictions on post-employment activities. These restrictions include limitations on where and who the employee could work for, who the employee could solicit or do business with, and what information the employee could use or disclose.
Job candidates also should be questioned about whether they possess any information or property of their past employers. Relevant inquires would include whether the employee retained any customer lists, marketing plans, intellectual property, and other potential trade secrets. The types of property would include any computers, smartphones, or other data storage devices used for work-related activities for their past employers.
If the job candidate has no contractual restrictions on their post-employment activities, and does not possess any information or property belonging to previous employers, the candidate should be required to confirm such in writing prior to being hired. If there are contractual restrictions or the new hire possesses information or property, employers should consider taking the next step.
Legal Assessment of the Noncompete
A vital step in preventing or mitigating the effects of a lawsuit to enforce a covenant not to compete is having legal counsel thoroughly review the situation. First, a lawyer in this field can review the agreement to see if it is valid and whether there are any defenses to its enforcement. In Delaware, for instance, some courts have found that an employer’s failure to pay certain compensation to the departing employee renders the noncompete unenforceable. A lawyer also can determine whether the restrictions are overly broad or unreasonable – thus making the restrictions less likely to be enforced.
Even if the agreement is enforceable, legal counsel can help develop strategies to eliminate or reduce the prospects for a lawsuit. For instance, an attorney can help craft a new hire’s job duties so that they do not violate the scope of the restrictions. Legal also can help identify relevant information which may be useful in developing legal defenses to the covenant not to compete. Such information might also be beneficial in the event the new employer decides to attempt to negotiate a deal with the former employer that would allow the employee to be hired.
Ensure Compliance Once the Employee is Hired
Employees who are hired with existing post-employment restrictions need to have clear, written instructions on what they can and cannot do. In addition to any limitations on the new hire’s job duties and activities, it is essential that the new employer confirm with incoming employees that they have conducted a thorough search of any computers, hard drives, and email and cloud accounts for proprietary or confidential information belonging to past employers. New hires also should be instructed that they are not to use or disclose any of their former employers’ trade secrets or confidential information.
Taking these steps will not completely eliminate the risk of a lawsuit by a former employer. However, it should significantly reduce the possibility of getting sued, and at the very least reduce the new employer’s potential liability should a claim be brought against it.