This article appeared in the Spring 2007 issue of the Business Litigation
Committee Newsletter.
Drafting Employee Non-Competition Agreements With a Litigation
Perspective
By John C. Stevason
A litigator attempting to enforce a non-competition agreement against an employee is stuck with
a document that may have been negotiated years before. Provisions which pleased the client
when the agreement was drafted because of restrictions placed on the employee, may stand in the
way of obtaining meaningful relief against the employee in court. While options may be limited
at the time of litigation, when the non-compete is drafted and negotiated, the lawyer has a clear
slate to create a document and make a record that will facilitate enforcement.
Non-competition agreements, particularly employment non-competition agreements, are subject
to state laws which generally are far more variable than the laws applicable to most other kinds
of contracts. There are, however, a few basic guidelines in drafting such agreements which, if
followed, should enhance the prospect of successful enforcement in most jurisdictions. An
essential ingredient to drafting enforceable non-competition agreements in the employment
context is being able to convince the client that less can be more, and that over-reaching noncompete agreements are often unenforceable non-compete agreements.
Drafting an employment non-compete agreement from the perspective of future litigation, rather
than with an emphasis on restrictive covenants has many advantages. Not only does this
approach help the litigator should enforcement ever become necessary, but an agreement which
is designed for enforceability at each stage of the drafting and negotiation process is more likely
to avoid litigation and lead to a favorable settlement, as employee’s counsel and counsel for the
employee’s new employer, may be less willing to risk the court battle. Further, employees may
be more willing to comply voluntarily with an agreement which they perceive to be more
reasonable and even-handed, and which provides more options for gainful employment, than the
typical non-compete agreement.
AVOID COOKIE CUTTER AGREEMENTS
Business and employment lawyers collect agreements and contract clauses in an endless effort to
perfect their forms, with the goal of making their documents as airtight and comprehensive as
possible. In this process clauses are rarely excised, under the belief that more is better and any
clause may add some additional protection. The results are often bloated forms that tend to
converge on a document that, in the case of non-compete agreements, maximize the restrictive
covenants. This process may work in the normal give and take of contract negotiations which
ordinarily will lead to a reasonable compromise agreement. However, this normal “give and
take” is not fully operative in the employment context, where the situation is more often “take it
or leave it.” The result can be an over-reaching document that can do a client a disservice when
the conscience of the court must be appealed to for injunctive relief. Covenants not to compete
are restraints of trade that have been disfavored under the common law for at least 600 years, and
cookie cutter forms adorned with comprehensive restrictive covenants are less likely to dispose
the court towards enforcement.[1]
The alternative is an agreement tailored to the client, the client’s business, and the client’s
employees.
THE PROTECTIBLE INTEREST
Often non-compete agreements are drafted with a focus on preventing the employee from
competing. Perversely, focusing on competition may make the agreement less likely to be
enforced. Restraints of trade are disfavored. Generally, non-compete agreements are
enforceable only if a legitimate protectable interest is served.[2] As a general rule, any restraint
which is greater than necessary to protect such legitimate interest is unreasonable.[3] Therefore,
the first step in drafting a litigation-aware agreement should be to define the client’s protectible
interests. To do this properly, the drafter must know the client’s business, its products and
services, its marketing and distribution methods, its customers and suppliers. However,
identifying the traditional protectible interests, such as confidential information, customer
relations, company goodwill, investment in training and opportunity costs, is only the starting
point. The drafter must help the client avoid thinking in terms of preventing competition, and
instead, articulate how the particular protectible interests would be put in jeopardy by particular
competitive activities of particular employees. It is then the job of the drafter to incorporate
these particular circumstances into the agreement to make a factual record of the interests, and
the threats to those interests.
PARTICULAR COMPETITIVE ACTIVITIES OF PARTICULAR EMPLOYEES
Following this approach, the non-compete agreement of a salesperson should probably look
different than the non-compete agreement of an engineer or technical employee and both should
look different than the non-compete agreement of a management employee. The protectible
interests that a management employee can threaten are very likely different than those that can
be threatened by a salesperson or engineer, and the activities of these employees which threaten
these different protectible interests are also likely to be different. While it may be simple to
prohibit all competition, preventing competition is not itself a legitimate protectible interest[4],
and a court may be less likely to enforce an agreement which it believes is designed to simply
prevent competition rather than to protect a legitimate interest of the client. For example, a
client’s engineer may have access to the client’s trade secrets but know nothing about the client’s
customers. The drafter should then explore with the client whether there are any jobs this
[1]
See, Giving the Green Light to Silicon Alloy Employees: No-Compete Agreement Between Internet Companies
and Employees Under New York Law, Fordham Intellectual Property, Media and Entertainment Law Journal (Spring
2001)
[2]
[3]
E.g., West Group Broadcasting, Ltd v. Bell., 942 S.W.2d 934, 937 (Mo. App. S.D. 1997).
See, e.g., Restatement (Second) of Contracts § 188, comment a (1981).
[4]
See, e.g., Steamatic of Kansas City, Inc. v. Rhea, 763 S.W.2d 190 (Mo. App. W.D. 1988) (“an employer cannot
extract a restrictive covenant from an employee merely to protect himself from competition”).
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engineer could perform, even for a competitor, which would threaten neither the client’s interest
in its customers nor its trade secrets. If such work exists, such as if the engineer were to work
exclusively as a salesperson, then an agreement which prohibited such work could be challenged
as overbroad and not intended to protect a protectible interest, but instead intended to prevent
competition. If, on the other hand, the engineer could reasonably threaten the client’s protectible
interest even when working in other capacities, because, for example, the engineer had unique
knowledge or access while working for the client, then those facts should be set forth in the
agreement as reasons for proscribing such competitive activities. If it becomes necessary to
enforce the agreement in court, a statement of specific facts, which the employee acknowledges
in the agreement are true, is much more effective in preventing an employee from asserting a
contrary position during litigation, than if the agreement simply stated a legal conclusion that any
competition by the employee would harm the client.
This process of focusing on how particular activities of particular employees may threaten a
particular client’s interests will likely lead to more narrowly-defined restrictions. Narrowlydefined restrictive covenants increase the likelihood that the agreement will be enforced. Even
where a non-competition covenant is clearly designed to protect the legitimate interests of the
client, the court must still balance the client’s need to protect such interests against the
employee’s interest in being able to be gainfully employed.[5] A covenant that provides more
employment options is more likely to satisfy a court that the proper balance has been struck.
Further, there are incentives for an employee to live within the terms of such narrowly-tailored
agreements. First, there is a broader range of activities the employee can engage in without
breaching the covenants. Second, the employee and the employee’s prospective employer are
more likely to be advised by their own counsel that such narrower restrictions on competition are
more likely to be enforced. Third, an employee may be more likely to comply with a covenant if
the employee understands the reasons for the restrictions and does not feel that the client is
taking advantage of the employee.
Finally, clients should be cautioned against requiring all employees to sign non-competes,
particularly where some employees really pose no threat or only a marginal threat to the client’s
protectible interests. The existence of such a broad requirement that all or most employees sign
a non-compete agreement may undermine the enforcement against even an employee who can
legitimately harm the client by competing. The client who requires that everyone sign a
non-compete agreement, may be handing opposing counsel an argument that such broad use of
non-competes shows that the client is over-reaching, is not acting in good faith and is simply
trying to stifle competition rather than protect specific interests.
REASONABLE TIME AND GEOGRAPHY
It is not uncommon for a client to begin the discussion of non-compete agreements by asking
what is the longest time and the largest geographic area in which the employee can be prevented
from competing. The drafter may better serve the client, however, if the discussion of duration
and geography takes place only after the identification of the protectible interests and the
[5]
See, e.g., EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299, 312 (S.D. N.Y. 1999).
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particular activities that employees may engage in to threaten those interests. Geography and
time are only relevant as they are necessary to protect those interests. Again, a record should be
made in the document itself as to why a particular geographic area and duration of the covenant
is not only necessary but also reasonable to protect the legitimate interests of the client when
balanced against the employee’s interest in being gainfully employed.[6] For the reasons
discussed in the previous section, a less restrictive and more reasonable limitation in terms of
time and geographic area is more likely to be enforceable on one hand, and avoid the need for
enforcement on the other.
“Blue Pencil” Of Duration And Geographic Scope
Non-compete agreements are unique creatures of state law, and one of the areas where there is
significant diversity among jurisdictions is what constitutes a reasonable restriction on
competing, particularly with respect to the duration and geographic scope of covenants limiting
competition. The spectrum runs from the position that no duration and scope restrictions are
reasonable because all employment non-compete agreements are unenforceable
(e.g., California[7]), to jurisdictions where a court may liberally re-write or “blue pencil”
unreasonable provisions to make them enforceable (e.g., Oregon[8]). In between these extremes,
some jurisdictions may strike the entire agreement if any clause in the non-compete agreement is
unreasonable (e.g., Wisconsin[9]). Other jurisdictions may “blue pencil” only to the extent of
completely striking, rather than rewriting unreasonable clauses, while leaving intact remaining
clauses (e.g., Arizona[10]). While the particular state law, therefore, must be foremost in the
drafter’s consideration, even a court in a blue pencil state is less likely to re-write a provision to
make it enforceable, if the provision is unreasonably over-reaching. Such over-reaching raises
issues of the employer’s good faith and reasonableness which are particularly relevant when
seeking equitable relief. Courts may be particularly sensitive to the fact that such over-reaching
provisions may have a chilling effect on employees, even if they are unenforceable. A court
may, therefore, be reluctant to re-write the agreement to make it enforceable, especially if the
court had reason to believe the chilling effect was intentional because of the degree of
unreasonableness of the original provision.[11]
[6]
While a one-year restriction may be a reasonable restraint in most cases, applying such a rule of thumb without
considering the unique circumstances of the client’s protectible interests may lead to an unenforceable agreement.
For example, in the fast changing world of Internet time, one year may be too long. See, Doubleclick v. Henderson
(1997 WL 731413 N.Y. Supp.).
[7]
Calif. Business and Professions Code §§ 16600 et seq.
[8]
E.g., Lavey v. Edwards, 264 Or. 331, 334-35 (1973).
[9]
Wisc. Stats. § 103.465.
[10]
Valley Medical Specialists v. Farber, 194 Ariz. 363, 372 (1999).
[11]
See, e.g., Varsity Gold, Inc. v. Porzio, 202 Ariz. 355, 356 (2002); Webcraft Technologies, Inc. v. McCaw, 674
F. Supp. 1039, 1047 (S.D. N.Y. 1987).
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In states which will only blue pencil by deleting unenforceable clauses in their entirety, the
drafter may wish to consider the use of fall-back provisions. For example, a large geographic
scope could be set forth with the explicit condition that if a court finds the scope unreasonable,
then the scope is to be some smaller geographic area also set forth in the agreement, and if that is
also found unreasonable, then some smaller area, and so on. The same could be done for
duration, e.g., “three years, however, if that is found unreasonable, then two years, and if that is
found unreasonable, one year.” Here again, however, a drafter should be concerned that if the
broadest restrictions are too broad, a court may view them as over-reaching or as a means of
chilling an employee’s activities, thereby foreclosing equitable relief for reasons of the
employer’s bad faith.[12]
RELATED RESTRICTIVE COVENANTS
In some jurisdictions, independent restrictive covenants prohibiting the solicitation of the client’s
customers and employees may be held to be enforceable, even where a straight non-compete
covenant would not.[13] It is a good practice, therefore, to list separately covenants restricting
such activities. Again, the restrictions should be no broader than what are necessary and
reasonable to protect the protectible interests of the client.
Generally, all jurisdictions will treat confidentiality/trade secret provisions as enforceable, even
if non-compete provisions would not be. Here again, the drafter should clearly define in the
agreement the confidential information, its importance to the company, and the employee’s
access to such information.
In Summary: Avoid cookie cutter non-compete agreements. Don’t over-reach; less is usually
more enforceable. The non-competition agreement should address the particular interests of the
client and how particular employees can threaten such interests. The factual support for such
interests and threats should be set forth in the document itself and acknowledged by the
employee.
[12]
See, cases cited in previous footnote.
[13]
See, e.g., Missouri, where a restriction on non-solicitation of former employer’s customers stands on a different
footing than a non-competition provision. See, Property Tax Representatives, Inc. v. Chatman, 891 SW2nd 153,
158 (Mo. App. WD1995).
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John C. Stevason is the Portland Chair of the Labor and Employment Practice Group
(stevasonj@lanepowell.com) of Lane Powell PC. He represents management in collective
bargaining, arbitrations, unfair labor practice charges, discrimination, harassment, wage and hour
and wrongful discharge matters. Mr. Stevason was Chair of the Oregon State Bar’s Section on
Computer and Internet Law, and Co-Editor-in-Chief and an author of Computer Law, a twovolume treatise on computer and Internet law for attorneys. Mr. Stevason is a frequent speaker
on employment issues relating to the Internet and electronic communications.
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