Critically Thinking About the Use of Non-Competes

Do you use non-compete agreements in your business?  If so, it is now time that you reconsider which employees you require to sign them with and why. 

Recently, Jimmy John’s reached a settlement with the state of New York’s Attorney General eliminating non-compete agreements for employees at Jimmy John’s franchises in that state following an investigation dating back to 2014.  The sandwich chain also agreed to not enforce the same provisions in Illinois after being sued by Illinois’ Attorney General earlier this month.    Note that these non-compete agreements were not specifically for some high-level executives, or people with special knowledge or skills.  Instead, they were for the people behind the counter making your sandwiches. 

In general, non-competes, along with other things like non-solicitation agreements, are lumped under the label of ‘restrictive covenants’.  Restrictive covenants are very useful in protecting a company’s secrets or to prevent unfair competition against them by their former employees.  In that capacity, there is nothing wrong with using them, but they should be used wisely. 

While the enforceability of restrictive covenants can vary wildly from state to state (compare California or North Dakota to Texas, for example), these covenants generally need to be reasonable to protect the employer, which brings me back to Jimmy John’s.  I, like the attorneys general from NY and IL, fail to see why Jimmy John’s needs to be protected against their sandwich makers from working at Subway.  This isn’t as if the employees worked at Coca-Cola and new the secret formula.  They were making sandwiches.  Period.

As it relates to your business, if you make everyone sign a non-compete when they start, you should analyze if that is really necessary.  First, non-competes can be expensive to draft.  Further, the laws non-competes are based on are subject to change, so you need to ensure that your form is up to date to make it enforceable.  Finally, if there is a dispute over the enforceability of the non-compete, they are even more costly to litigate.  Try to perform a cost-benefit analysis of whether you want to spend tens of thousands of dollars litigating over a low-level employee who left you to work somewhere else.

 Now that isn’t to say that you should leave your company unprotected, but there is more than one way to skin a cat.  You should carefully evaluate who could damage your business if they were to leave and work for a competitor.  Then, you should think about what would be most damaging about the employee leaving.  Most of the time, the answer to this question is that they may take key employees or clients with them.

If that is the case, it isn’t necessarily a non-compete that is needed, but rather a non-solicitation agreement.  Non-solicitation agreements prevent former employees from stealing clients or poaching employees.  Having litigated both sides of non-compete agreements and non-solicitation agreements, I can tell you that non-solicits and confidentiality agreements are much easier to enforce than non-competes.  For those employees that pose more risk than just taking clients, then a non-compete is more appropriate.  Just not for sandwich makers at Jimmy John’s.

If all that isn’t enough to convince you to take a look at your deployment of non-competes, the government is getting into the act as well.  Perhaps most interestingly, the White House has indicated that non-competes are overused and can hurt the economy, as well as individual employees.  This is something I expect the DOL to follow up on.  The NLRB has concerns with confidentiality provisions in non-competes.  Finally, states like Hawaii, New Mexico, and Utah are taking aims at eliminating non-competes in certain fields or reducing the enforceability of non-competes in general.  One thing is certain: change is coming in the arean of non-competes.

While non-competes are useful, they are not a one-size-fits-all solution.  Businesses should critically think about their end goal end plan to meet that goal, not take a scattershot approach to using non-competes.

Written by: Andrew Nielsen- Director of Compliance Services