In the past couple of months I have become involved in a number of disputes involving noncompete and non-solicitation agreements. The issue is not limited to local matters, but also on a national scale. The White House recently issued a report on the subject of noncompete agreements and the impact on the labor force and on the economy as a whole. From a business perspective, a noncompete contract is a useful tool to protect the business. However, the tool itself is a restraint on trade and is not always well received and, depending on the language, may not be enforceable. Analysis of enforceability is very fact dependent and may differ from one employee to another.
So let us imagine a marketing company focused on multi-media and online advertising with a dozen employees plus two partners who own the business. After the two partners, there is a creative director, three account managers, two graphic artists, three web designers/programmers, a social media marketing expert, and two administrative staff. The partners have all employees sign that same non-compete agreement that contains the following terms:
- Noncompetition during the employment plus 2 years after the employment within 50 miles of the firm’s office in Frederick.
- Nonsolicitation of company clients, former clients, or prospective clients for 2 years after employment
The above terms are not something I plucked out of the air and exaggerated, but are something that I see regularly in noncompete agreements and I have one such agreement sitting in a folder on my desk as I write this.
A quick recap of the law is necessary before we launch into an analysis of our fictitious marketing company and their noncompete. A 1973 Maryland case called Becker v. Bailey laid down the general standard: a noncompete agreement is enforceable: “if the restraint is confined within limits which are no wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose undue hardship on the employee or disregard the interests of the public.” The analysis is done in two stages. The first will look at time and geography, that is, how long does the noncompete last and how broad a geographic range the employee prohibited to work in. The second stage will look at a few other factors:
- whether the person sought to be limited is an unskilled worker whose services are not unique;
- whether the covenant is necessary to prevent the solicitation of customers or the use of trade secrets,
- assigned routes, or private customer lists;
- whether there is any exploitation of personal contacts between the employee and customer; and,
- whether enforcement of the clause would impose an undue hardship on the employee or disregard the interests of the public.
Although not formally part of the analysis used by courts, I would also argue that noncompete agreements should be analyzed from the perspective of whether an employee’s work is a core function of the business. Finally, just as an informational matter, public interest would include matters such as medical professionals (courts really don’t like noncompete agreements for doctors), lawyers, accountants, or other public service professions. Public impact is unlikely to be a factor in noncompete agreements for marketing and creative personnel.
The most difficult aspect of a noncompete agreement is that the reasonableness of the agreement, and thus its enforceability, is highly fact dependent. Often times, when drafting a noncompete agreement, it is helpful to do the legal analysis in reverse, analyzing the risk of impact to the company before determining the scope of the time and geography factors. So with these factors in mind, let’s begin our analysis.
Creative Director: Outside of the two partners of the firm, the creative director is probably the single most important person in the company. She would have access to all of the work done by the firm, access to all of the clients’ information, access to all of the proposals sent to potential clients, and often has personal connections with current and former clients. She may also have a wide range of contacts with creatives at other marketing firms and the community. The creative director is a skilled professional, whose personal connections could lead her to not only successfully open and staff a new marketing firm, there is a distinct possibility that clients would leave her current firm and follow her to a new firm. Given her personal success and likely professional development to this point, the creative director would not likely suffer an undue hardship if she left. Clearly, she is the biggest competition threat to the firm. So looking the basic non-compete, a two year duration is probably acceptable. The 50 mile radius sounds reasonable but consider that 50 miles from Frederick encompasses parts of Pennsylvania, West Virginia, Virginia and Washington, DC. All of those markets would likely have a different clientele and outlook. So for our creative director, even 50 miles might a bit of a stretch, something more akin to 30 miles might be more acceptable.
Account Managers: Our three account managers can be analyzed much like the creative director except that their exposure to the entirety of the client list is probably smaller and their personal connections limited largely to their own accounts. These individuals likely have less experience, but have the potential to successfully compete on a smaller scale against the firm. While these employees are core to functioning of our firm and they are clearly skilled, the potential impact to the marketing firm is smaller than that of the creative director. Looking at the noncompete though, two years and 50 miles might be considered unreasonable on the face of the agreement. In this case, it might be more reasonable to lower the time, to perhaps 1 year and a 30 mile radius from Frederick. These limits correlate to the level of risk to the company. While the company would likely lose business if the account manager left and either set up a competing business or went to a different marketing firm, the company could survive much more readily. Additionally, the 30 mile radius would give the account manager the ability to travel a bit to work which would not likely be considered an undue burden.
Graphic Artists/Web Designers/Social Media Marketer: I grouped these three categories together because they represent skilled and knowledgeable workers, but with more limited interaction with clients. Certainly, these individuals will work with clients and will no doubt build personal relationships, but their exposure to the breadth of the company’s clientele is more limited. Often these individuals would be working on discrete tasks within an overall client relationship. Their skills transfer but if they left the company, the impact, while significant in the short term, is not threatening to the existence of the company. So from a duration aspect, one year might be acceptable but could be a bit on the long side, whereas 6-9 months might be more palatable. Geographically, even a 30 mile radius might be difficult, but the company could be more flexible. The company could limit the noncompete agreement to a smaller radius of 15 miles for 9 months, but a larger radius of 20 miles for 6 months. Again, consider the risk to the company these employees represent.
Administrative Staff: These staffers might be just out of college, relocating to the area, or they could be older workers whose main skill and functionality is focused on making the company run smoothly. Typically, these individuals will have limited contact with clients, limited skills in the marketing field (if any), and limited ability to effectively compete with the company. Furthermore, their skills and knowledge are not unique or directly related to the core functioning of the company. In the case of these workers, it is very likely that any noncompete agreement would be reasonable and could represent a burden on their ability to work. Certainly a 2 year noncompete agreement would be unenforceable, and even a 3 month noncompete agreement would be a burden.
Generally, nonsolicitation agreements represent a safer mechanism to prevent competition from departing employees. A noncompete agreement expressly prohibits a person from forming a competing business or moving to a direct competitor in the market. On the other hand a nonsolicitation agreement expressly protects the clients and prospective clients of a business from being approached and poached by a departing employee, but allows the employee to perhaps work for a competitor if there is a limited market in the area. Many courts have looked a nonsolicitation agreements more favorably because the limitation is much more directly linked to a company’s business interests, after all, clients are the heart and soul of any business.
However, companies should take care to draft the nonsolicitation with specific definitions in mind. Companies may easily describe a current client as one who is actively engaged with the business. But the terms former clients and prospective clients need to be defined, usually with reference to a time period. The length of that time period should bear some relevance to the life cycle of a client contract. If the life cycle is a year or more, a two year nonsolicitation clause may be okay. If the life cycle is three months, two years looks pretty drastic.
Finally, companies should fully understand what a solicitation is or more specifically, what it is not. A former employee who posts on LinkedIn or Facebook an announcement that says, “I am working for company B now” is not a solicitation but a general announcement. Clients may or may not see the announcement and may or may not follow the former employee. The solicitation must be from the former employee and not a contact by a client to the former employee.
1. Noncompete agreements must only restrict an employee in terms of time and geography to the extent necessary to protect the interests of the company.
2. A company should assess the risks to the company associated with each employee or class of employees and draft noncompete agreements tailored to address that risk. One noncompete agreement does not fit all.
3. Noncompete agreements may adequately protect the company, but would still be unenforceable if they unduly burden the employee.
4. Nonsolicitation agreements should clearly define current clients, former clients, and prospective clients in order to be enforceable.
Note: This analysis is done using Maryland law using court cases. Other states have statutory laws that limit the use of noncompete agreements (California, for example, is particularly strict) and state court cases might use a different analysis.