Non-Competes: Pigs Get Fed, But Hogs Get Slaughtered

July 10, 2008

So you’ve got your program all lined up – every new employee, regardless of job duties – signs a ten-year covenant not to compete with an unlimited geographical scope. No exceptions. Everyone knows the rules, so you are ready to go to court when Joe, whose sales territory was the Northeast United States, goes to work for your competitor in the mid-West. 

Not so fast. Nothing frustrates clients as much as being told that a court won’t enforce an agreement that is clear and in black and white. But in order to be enforceable, a non-compete must be reasonably limited in duration and territory. The duration of the covenant cannot be longer than reasonably necessary to protect legitimate interests, such as customer goodwill, trade secrets or specialized training. For example, your agreement should be no longer than the time it will take a new hire to demonstrate his or her effectiveness to customers if the non-compete seeks to protect customer goodwill. Odds are that it is not ten years. In addition, the geographic scope needs to be limited to the territory covered by the employee during his or her employment in customer goodwill cases. Courts don’t readily enforce multi-country restrictions against sales people with limited territories. 

Although there are many cases in which courts have reformed or rewritten an overly broad non-compete, if an employer is a real hog, the court will simply state that it will not rewrite a non-compete and refuse to enforce it at all. This was clearly the case in 1973 in Reading Aviation Service, Inc. v. Bertolet, when the Pennsylvania Supreme Court said that they would not rewrite a non-compete that was unlimited in time and space. More recently, U.S. District Court Judge Stewart Dalzell in Fres-Co System USA, Inc. v. Bodell, reacted the same way and declined to reform an overly broad non-compete agreement stating that to do so would have sanctioned the employer’s use of his excessive bargaining power to insist upon unreasonable and excessive restrictions upon its employee. The court stated that the non-compete’s terms far exceeded what was reasonably necessary to protect plaintiff’s business interests because employer’s business was selling coffee packaging materials in the Southeastern United States and the Caribbean, whereas the non-compete spanned four industries on three continents. 

Many employers try to avoid this result by including a provision in the non-compete stating that should any portion or term of the non-compete be deemed unenforceable, the parties agree that the court should reform the agreement to one which is enforceable. However, the best practice is to include no terms in your non-compete that exceed what is reasonably necessary to protect your legitimate business interests. That analysis requires looking at each employee differently to determine what business interests would be jeopardized were there no restriction on his post-employment activities. Is it goodwill? Is it protection of trade secrets? What is the low end of the range of term of duration and geographic scope that will adequately protect you? Be honest and not overreaching, and you will be have a covenant that has a much greater chance of being enforced.