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LEGAL ISSUES

The Fine Line in Noncompetes

Companies in rapidly changing industries face a delicate balancing act when crafting enforceable noncompete agreements for employees. If they ask for too little, they run the risk of allowing departing workers to share the company's intellectual property with a new employer. But if they ask for too much, a court may deem the agreement suspect or even nullify it. "Be careful to tailor the agreement by defining any restrictions as narrowly as possible to reflect the legitimate interests of the company," says Russell Beck, a partner with the law firm Epstein Becker & Green PC in Boston. "Otherwise, the courts may not be willing to enforce these agreements. If the court sees the company overreaching, it could nullify the agreement completely."

Indeed, courts have been known to scale back noncompete agreements they have deemed too restrictive given the realities of the marketplace. For example, in one case, a New York court reduced the time frame for a noncompete agreement from 12 months to 6 months. The court reasoned that because the former employer's technology was changing rapidly, the original time frame in the agreement was too restrictive to the former employee and provided no benefit for the company. In a nutshell, this court decision demonstrates that an enforceable noncompete agreement must show "a genuine business interest for the employer balanced with the needs of employees," says Beck.

Companies may also need to craft narrow requirements when defining what activities signers of the agreement are prohibited from engaging in. Rather than issuing blanket restrictions that prevent former employees from working with any competitor in any capacity, companies may need to specify the types of work covered by the agreement.

"A former programmer may not be able to work in software development for a competitor, but he or she may be able to work in marketing," says Beck. Once again, any restrictions "have got to be legitimate and tied to the work the former employee did and the information he or she learned while with the former employer," he says.

In addition, a court asked to enforce a noncompete agreement will look at how widespread the use of such agreements is within the company and how diligently the company has enforced agreements with other former employees. Therefore, it is a good idea to limit these agreements to situations where they are really necessary, says Beck. Beyond that, "enforce all agreements equally, or a court may take that into consideration" when deciding whether to enforce a contested one, he advises.

If there is any good news here for businesses, it is that even as the courts frown upon noncompete agreements with unduly long time frames and overly broad restrictions, they are allowing companies to expand the geographic scope of these agreements when they have a legitimate need to do so, says Beck. After all, with so many companies operating virtually and competing globally, preventing a former employee from working for a competitor in a local geographic area is unlikely to provide adequate protection.