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Why Are Legal Restrictions Placed on Noncompetition Agreements


Failure to continually review existing agreements with counsel. The law on the applicability of non-compete obligations is constantly amended or restricted by changes in applicable laws and by courts of appeal that interpret the enforceability of certain provisions. And – as we see now with the measures taken by the Biden administration – they may soon be subject to other limits. Employers should regularly review their existing non-compete obligations and other agreements with experienced lawyers to ensure that a previously drafted agreement remains enforceable under applicable law or when implementing due diligence measures in connection with a business acquisition or preparation of a business for sale. Similarly, in October 2018, Massachusetts passed a law that significantly restricts the use of post-employment restrictions called the Massachusetts Noncompetition Agreement Act (MNAA). The law contains a long list of requirements for a non-compete obligation to be valid and enforceable. One of these requirements is that the agreement is supported by a “leave clause” in which the employer continues to pay the departing employee a portion of the employee`s base salary or provides other mutually agreed upon consideration during the period when the departing employee is excluded from work for a competitor. Another requirement imposed by the MNAA is that the agreement explicitly states that the employee may consult a lawyer before signing the agreement. State law also explicitly prohibits non-compete obligations for lawyers, doctors, nurses, social workers and broadcasters.

“Given the shortage of labor and the need for skilled talent, non-compete obligations are a way for employers to signal an employee`s value to the organization and the key role the employee plays in the company`s performance.” In the case of most non-compete obligations, the consideration takes the form of an offer of employment. In return for the hiring of the employee by the employer, the latter accepts the terms of the non-compete obligation. The non-compete obligation may be included in an employment contract, or it may be a separate document that is signed at the beginning of employment. But in any event, the agreement is likely to indicate that non-competition is a condition of the job offer. This raises concerns about whether workers – especially in low-skilled occupations – actually have real bargaining power at the time of recruitment, but in most cases a non-compete clause signed as an initial condition of employment is considered to be supported by adequate consideration. A garden holiday agreement is similar to a non-compete obligation, but provides compensation for the former employee during the period when competition is restricted. Thus, as in the case of a non-compete obligation, the former employee is prohibited from competing with the employer, but in a garden holiday agreement, the former employee is paid by the former employer for avoiding competition. While yard holiday agreements provide for more concrete consideration of employees and may address employers` concerns about the loss of trade secrets or goodwill, they require employers to pay former employees not to work, so the additional costs can make them impractical. Depending on the situation and jurisdiction, employers who want to protect commercial interests when an employee leaves sometimes have alternatives to non-compete obligations that do not want to use a traditional non-compete obligation.

These alternatives may allow for the application of non-compete obligations in a state where they are unpopular, and they may also address potential concerns about unequal bargaining power and reasonable consideration. Even if their state legislature enacts laws that restrict or further prohibit the use of non-compete obligations, employers still have strong arrows in their legal difficulties. First, employers can assert contractual claims against their former employees for breach of an employment contract, which may include the agreements described above. Second, employers could take legal action against their former employees under the DTSA, UTSA, Computer Fraud and Abuse Act, Unfair Trade Practices Act or similar laws. They could also have similar claims against the new employer of their former employees. Third, employers still have potential common law claims against their former employees, including unauthorized interference in contractual or business relationships if the employee is suspected of wrongfully disrupting a contract or customer relationship, conversion for theft of the employer`s property, breach of a fiduciary duty, or similar claims. Employers may want to develop standard reminders that inform their departing employees of the existence of these types of rights and the employee`s expectations at work for a new employer. Federal lawmakers have also focused on this issue, proposing laws to restrict the application of restrictions after employment ends. President Biden`s “Plan to Strengthen Organization, Collective Bargaining, and Unions” states that it plans to “work with Congress to eliminate all but the few that are absolutely necessary to protect a narrowly defined category of trade secrets.” Several senators, including the one from Connecticut, have supported bills banning non-compete laws that have not yet been put to a vote. Non-compete obligations can be presented to both new employees during the recruitment process and existing employees. New employees who are offered non-compete obligations have the opportunity to negotiate contractual terms and higher wages. Existing employees have an even stronger hand.

In this case, the current employee must receive something of value for the non-compete obligation to be enforceable. A change in job title, compensation or benefits is valuable and could be negotiated by the existing employee. We believe that there may be changes that limit the ability of employers to rely on non-compete obligations to protect their business interests. Employers who rely on post-employment restrictions may want to review their current practices and protocols in light of evolving state and possibly federal legislation to ensure adequate protections are in place. Our employment lawyers are ready to answer your questions and help you find the best practices for your business. Non-disclosure agreements (NDAs) may contain provisions on trade secrets and, if applied, may impose severe penalties. As a result, trade secret disputes are costly, time-consuming, and often only arise after information has been shared. At the most basic level, non-compete obligations are contracts in which employees agree not to compete with a former employer for a certain period of time after leaving the company. Critics of the non-compete obligations insist that the restrictive agreement harms competition, stifles employee mobility and is a superfluous tool to protect confidential information. Because of these competing interests, non-compete obligations must contain restrictions.

As a rule, they are limited by scope, geography and time. .