Tuesday, September 9, 2014

The Key To Ensuring Your Non-Compete Agreement Is Enforceable

There's nothing worse for a corporate client than to discover after a key employee has left that the enforceability of its non-compete agreement is questionable.

It happens all the time. 

These clients are surprised to learn that a blanket non-compete prohibiting a former employee from "directly or indirectly" owning, managing, operating, joining, controlling, or accepting employment with "any business which is competative with the Company" is almost always unenforceable on its face and is generally unenforceable as applied.

They are surprised to learn that a non-compete that exceeds two years will usually be frowned upon.

They are surprised to learn that if the geographic scope of the non-compete is worldwide, they better have a darn good reason.

"But any competition is harmful," my clients will say.

And it's true - in some circumstances, some employees are so valuable that their mere presence in the same market as their former employer poses a significant threat to their former employer's business.

There is a solution.  It's simple.  And it's so brilliant that I'm pretty irked that I didn't cook this up myself. 

Liquidated damages. 

I know, I know - they get a bad rap.  Sometimes courts view them as penalities if they aren't reasonable.  (As an aside - have you noticed how the law LOVES using a reasonableness standard?  I mean, what is that, anyway?  Who gets to decide what is reasonable?  This, my friends, is the subject of a whole other post.)

But think about it: with a liquidated damages clause, if Susie Q chooses to compete in violation of her agreement, she is absolutely free to do so. 

She just has to pay for it.

It completely takes away the argument most former employees make, which is that they cannot work if the agreement is enforced.  With liquidated damages, they get to work, but at a price.

And it is setting the price that allows a lawyer to really make her money, because that's where the fight will be.  The value in this is obvious: everybody gets to keep proceeding with life while the lawyers argue not about the enforceability of the contract, but rather about whether the amount set in the contract for the liquidated damages is reasonable (there's that word again).

 Is it perfect?  No, it's not perfect. 

And it's not going to work for every situation.   

Maybe the employer WANTS to go for an injunction and prevent an employee from working.

Maybe the employee isn't collectible.

But for high-level executives with dough, who stand to bankrupt a company if they compete within a former employer's market?  These are the types of employees that a liquidated damages clause is designed to address.     

So how should the liquidated damages provision be worded?  How should the price be determined?  I'm sorry to say, friends, that I can't give all my secrets away here.  I mean, lawyers have to eat too! 

But I'm happy to help you if you reach out to me.  I love hearing from people who read the blog!  (Mostly, I love knowing that people actually read!)  Do you need more information?  Would you like to see an example?  Shoot me an e-mail and I'd love to keep the conversation going. 

Liza Favaro
Non-Compete Counsel


* Disclaimer: The ideas and opinions shared on this site are my own and are not attributable to my employer. No amount of interaction on this site will create an attorney-client relationship. If you have a legal question and you ask it here, I will also answer it here (if I can), but such answers do not guarantee results and do not create an attorney-client relationship. If you wish to contact me directly, you may do so at efavaro@gmhlaw.com.




4 comments:

Bob Small said...

I strongly disagree that a liquidated damages provision is the ore even a solution to an unenforceable protective covenant. In PA and every other state where I have sought to enforce such covenants for nearly 40 years, the law requires that the covenant may protect only against UNFAIR competition, not simply competition. Unfair competition arises where the former employer has given something to the former employee that gives him or her a competitive advantage such as specialized training, access to trade secrets or the ability to establish a special relationship with customers. If you can prove UNFAIR competition courts will enforce protective covenants in states where they are permissible at all. If you cannot prove that there would be no basis to enforce a liquidated damages clause. That is, in the absence of proving unfair competition there are no damages at all. If you have a citation to a case where a court enforced a liquidated damages clause while not enforcing an underlying protective covenant I would greatly appreciate you providing the citation.

Bob Small said...

I strongly disagree that a liquidated damages provision is a solution to an unenforceable protective covenant. In PA and every other state where I have sought to enforce such covenants for nearly 40 years, the law requires that the covenant may protect only against UNFAIR competition, not simply competition. Unfair competition arises where the former employer has given something to the former employee that gives him or her a competitive advantage such as specialized training, access to trade secrets or the ability to establish a special relationship with customers. If you can prove UNFAIR competition courts will enforce protective covenants in states where they are permissible at all. If you cannot prove that there would be no basis to enforce a liquidated damages clause. That is, in the absence of proving unfair competition there are no damages at all. If you have a citation to a case where a court enforced a liquidated damages clause while not enforcing an underlying protective covenant I would greatly appreciate you providing the citation.

David R. Burtt said...

If they are effective elsewhere, liquidated damages clauses obviously won't work in California. Forfeiture provisions violate BPC 16600 just as cleanly as do straight-up prohibitions on competition (see Edwards v. Arthur Anderson).

liza favaro said...

David, I practice in Michigan and I'm pretty clear about that in my blog. If I wasn't clear about that in this particular post, that's my fault, but I have never pretended to know anything about California law! Bob, I think I've already addressed your comment on LinkedIn, but if not, feel free to let me know.

Thanks for reading.