The proliferation of the use of non-compete agreements was highlighted in a recent article in the New York Times (see, “How Noncompete Clauses Keep Workers Locked In”, May 13, 2017). The article referenced a survey which concluded that about 20 percent of the American workforce was subject to some form of non-compete clause, and how these agreements are hurting employee mobility. This explains why a number of states, including California and Utah, have banned or limited the use of such agreements, and why other states are considering such legislation.
In Delaware, non-compete agreements are considered restraints on trade, so courts such as the Delaware Court of Chancery will enforce them only if they are “reasonable”. The reasonableness of the restrictions depends upon factors such as the employer’s interest in protecting its business; the scope of the restrictions; the employee’s right to work and earn a living; and the public’s interest in free trade and competition. Below are a number of considerations for businesses to consider when drafting and enforcing non-competes subject to Delaware law.
Ask Yourself – What are You Trying to Protect?
The most widely recognized protectable interests are confidential, proprietary information of the company, and the business goodwill it has cultivated with its customer. The Court of Chancery has recognized that a business has an economic interest in protecting its confidential and proprietary information. Importantly, however, the information must be of such confidential nature that it would give the former employee (and his/her new employer) and unfair competitive advantage. Confidential information generally does not include skills the employee acquired during his employment or information that is available to the public through other sources.
Think Twice Before Requiring a Low-level Employee to Sign a Non-Compete
One of the major missteps a company can make is trying to enforce non-competes against rank and file employees. Not only are courts unsympathetic to such situations, but it can jeopardize the effectiveness of agreements with other employees. A Chancery Court case where an employer sought to enforce a non-compete against a former custodial worker is an example of overreaching. The key question a company should be asking is whether the employee has access to information worthy of protection through a noncompetition agreement, such as highly confidential or proprietary business information, trade secrets, or customer relations information. If the employee does not have access to such types of information, then a non-compete is usually not appropriate.
Consider Non-Solicitation Agreements as an Alternative
If the purpose of the restriction is to protect customer goodwill, a business should consider using a non-solicitation clause instead of a blanket prohibition on competition. A non-solicitation clause typically restricts or restrains and employee’s ability to contact present, past, or sometimes even prospective clients of the employer. Courts are generally more receptive to non-solicitation agreements since they normally do not restrict an employee from being able to work and earn a living.
When deciding whether to enforce a non-compete, courts have to balance the harms faced by the business seeking to enforce the agreement with the harm to the former employee and restraint on free trade. In order to be enforced, agreements must have a reasonable time limit. The determination of whether a time period is reasonable is fact specific and usually involves an analysis of the former employee’s duties and the relevancy of the confidential information. Courts in Delaware have in general presumed that restrictions of two years or less are reasonable, unless circumstances demonstrate otherwise. Longer periods may be necessary to protect the business, particularly if the former employee had access to confidential information which could provide a competitor with an unfair competitive advantage for many years following the employee’s departure.
Finally, avoid going into court seeking emergency injunctive relief on a stale claim. While the Court of Chancery is considered one of the most responsive courts in the country for expedited relief, you won’t win any favors by requesting a temporary restraining order on an action that should have been brought months earlier. Even if the delay was for settlement discussions, the Court of Chancery will expect you to dual track enforcement efforts with settlement talks in order to preserve your rights to expedited injunctive relief.