Academic journal article Review of Business

Employment Noncompetition Agreements: An Update

Academic journal article Review of Business

Employment Noncompetition Agreements: An Update

Article excerpt

Agreements restricting a departing employee's competitive activities are often found in the employment contracts of managers, sales persons, and employees with access to sensitive technical information. These noncompetition agreements are frequently the subject of disputes, and lawsuits brought over their validity and/or enforceability are common. This should not be surprising since the agreements attempt to regulate behavior where the interests of the employee and the employer are widely divergent. Upon leaving his or her job an employee will want as much flexibility as possible while the former employer will want to protect its goodwill and prevent any disclosure of trade secrets or confidential information. To protect itself from these threats an employer will often use a noncompetition agreement restricting the departing employee's competitive activities. The competitive activities which the employer seeks to limit often represents the employee's livelihood. This article examines the law on the subject of noncompetition agreements. Most states recognize the validity of noncompetition agreements in employment contracts. However, a few states, most notably, California, prohibit them |2~. States prohibiting such agreements do so in order to protect the public's access to the widest variety of competition and to prevent any limitations on an employee's ability to earn a livelihood. Also, there are states, like Massachusetts, which generally recognize the validity of noncompetition agreements, but which exclude certain types of employees from the agreements. For example, in Massachusetts physicians and lawyers may not enter into noncompetition agreements |17~.

Those states recognizing the validity of non-competition agreements usually do so through the decisions of their state courts. These courts typically evaluate the validity of a non-competition agreement by balancing the employer's interests in protecting trade secrets, confidential information and/or goodwill against the employee's burden of restricted employment opportunities and the agreement's impact on the public. What are employers' interests in having such agreements?

Protectable Employer Interests

One of the most frequent claims in support of a noncompetition agreement is that the employer has a protectable interest in confidential information. While courts generally uphold noncompetition agreements where confidential information is involved, the real controversy usually concerns whether the particular information involved qualifies as confidential. A recent Illinois case held that a janitorial service's pricing formula and the costs included in the formula were confidential and so entitled to protection through enforcement of a noncompetition agreement. In the case, a senior account executive had signed a noncompetition agreement which, after moving his employment to a competing janitorial service, he sought to avoid. Included in the information which the Illinois court found confidential were the employer's workers' compensation rate, its premiums for public liability insurance, and its overhead and profit margins which were added to the janitorial service's bids. In support of its decision the court also noted that the janitorial service treated this information as confidential by keeping it in locked desk drawers or in a locked file room with a system for checking out the information |13~. Distinguishing between information that is confidential and information that is not is often difficult for all parties. The Supreme Court of Texas was recently faced with a dispute in which a security services employer sought to protect, as confidential, its customers' identities, their special needs, and the security service's pricing policies, cost factors, and bidding strategies. As to the customers' identities, the court said the employer had failed to show that they could not be readily identified by outsiders or that the information carried any competitive advantage. …

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