Academic journal article SAM Advanced Management Journal

Covenants-Not-to-Compete: The Relationship of Training and Education Criteria to Enforceability

Academic journal article SAM Advanced Management Journal

Covenants-Not-to-Compete: The Relationship of Training and Education Criteria to Enforceability

Article excerpt

This article deals with one important question arising from covenants-not-to-compete in employment: to what degree does an employer's investment in its employees' training and education create a legally protectable interest to make the covenant enforceable against the employee? Initially, training and education are certainly good for employers as the result is a more valuable and productive workforce. Training and education are especially beneficial to employees who become more skilled and knowledgeable and, thus, ultimately more marketable. Yet employees whose training and education are provided by their employers, and who sign covenants-not-to-compete, must be forewarned that the training and education may provide the legal basis for the enforceability of such covenants by the employer against the employee, possibly precluding or hindering the employee's future economic opportunities. Covenants-not-to-compete are becoming increasingly prevalent as employers need skilled and knowledgeable workforces. They may perceive a need to educate and train employees, particularly regarding rapidly changing and advancing technology, yet they also want to protect the investment they have made in developing this more skilled and knowledgeable workforce.

This article provides certain legal principles regarding covenants-not-to-compete, both generally and in the context of the employment relationship. Next, the authors analyze the training and education criteria that will make a covenant legal, valid, and enforceable. We examine pertinent state statutes and cases interpreting those statutes as well as common law judicial decisions; and then we supply the legal analysis based on the aforementioned laws as well as legal commentary. Some of the international ramifications of covenants-not-to-compete are examined. Finally, we address the difficult area of Conflicts of Laws, including Choice of Forum and Choice of Law provisions in contracts and how they relate to covenants in employment. Based on this analysis as well as our own knowledge and experiences, we offer practical recommendations to employers and employees.

Covenants-Not-To-Compete in Employment--General Requirements

No federal law in the U.S. deals with covenants-not-to-compete; they are governed by state law, which obviously can vary from state to state. Many states have statutes that govern covenants-not-to-compete that usually are generally worded and therefore must be interpreted by the courts when applied to covenant disputes. Moreover, some states base their covenant law on the common law, that is, purely judicial decisions and precedents. As such, managers and human resources professionals, as part of efforts to attract and retain qualified employees, must also do their homework in planning how to make sure that new employees do not eventually take trade secrets or skills learned or acquired as a result of their employment to competitors who might hire them for a higher salary (Mujtaba, 2014).

Managers should be aware that covenants-not-to-compete, which are also called non-competition or non-compete agreements, generally prohibit employees from competing directly or indirectly against their former employers. Covenants-not-to-compete can arise in three aspects of the employment relationship: 1) before the beginning of employment, typically as a prerequisite to employment; 2) at the commencement of employment, for example, during an employee orientation; and 3) during the term of employment, usually concomitant to a promotion, but before the employee leaves (Bishara and Orozco, 2012). In any of the preceding situations the result can be to restrict competition.

Yet the law likes competition, as evidenced by the large body of federal and state anti-trust law that tries to protect and promote competition. However, a covenant-not-to-compete in an employment contract may be deemed valid and enforceable (by means of a lawsuit for breach of contract as well as an injunction) if certain legal requirements are met. …

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