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Weisblatt Law Firm, LLC $1000.00 Scholarship Winner Jaqueline Rojas

“In today’s day and age, information (even sensitive information) about businesses can be found easier than ever before. Businesses often protect themselves from the release of sensitive information by requiring employees to enter into non-competition agreements.  Should non-competes be enforced?  What about the employee’s need for subsequent employment?  How should courts strike this balance and what factors should they consider?”

Importance to Address Variability in Non-Competes for the Good of Employers and Employees

In a world where information is readily available and can be easily shared, employers may fear the nightmare scenario of a lower-level employee causing harm to their business by simply downloading valuable information to a thumb drive and taking it to a competitor. While this scenario may be a bit extreme, the possibility of an employee using skills and proprietary knowledge from a former employer to work for a competitor or start up their own similar business is a legitimate concern to have. Thus, many employers may ask workers to sign a non-compete. Covenants not to compete (“non-competes” or “CNCs”) are known as a “post-employment restrictive covenant between an employer and an employee that prohibits the employee from going to work for a competitor or otherwise competing with the former employer [1].” Despite their long history and common use, non-competes remain to be a controversial topic and deciding whether to enforce a non-compete can be tricky. Those against non-competes argue that non-competes limit innovation and restrict an employee’s right to seek better employment opportunities, especially for employees already at a disadvantage such as low-wage workers. On the other hand, non-competes may be a reasonable choice for high skilled professionals who may have access to legitimate proprietary information. Therefore, in order to strike a balance for both parties non-competes should be enforced, but only if careful evaluation is taken to prevent workers such as low-wage workers from being negatively affected by non-competes.

Non-competes are not new, but their recent trend in finding their way into every corner of the job market and at all levels has put in danger the rights of workers, especially low-wage workers. According to a report from the Treasury Department, it is estimated that 30 million workers are restricted by non-competes [2]. Non-competes use to be limited for the most skilled and highly paid workers such as talented scientist, engineers, and CEOs. However, non-competes are now being applied to low-wage workers. One well known example of this is the case of Jimmy John’s. It was found that it required essentially all of its employees at all levels, including sandwich makers, to “sign non-compete agreements that restrict the signee from working at an establishment that gets 10% of its revenue from sandwich-like items within 3 miles of any Jimmy Johns location for 2 years” [1]. In the end, the non-compete was not enforced, but Jimmy John’s is not a rare example.

Many entry level health care workers, landscapers, janitors, and other unskilled labors are being required to sign non-competes [3]. This is a dangerous practice and possibly abusive since these employees typically do not have much bargaining power when negotiating a non-compete. Additionally, a non-compete can detrimentally affect low-wage workers if they are out of a job for too long or have to travel an unreasonable distance to find a new job. If these employees cannot use their experience to apply for a better job, then finding subsequent employment could mean starting all over again and perhaps earning even less than before. Typically, most courts take into consideration the effect a non-compete could have on an employee. Therefore, decisions to enforce are usually made based off whether it is “reasonable”, which requires employers to demonstrate a legitimate business is at risk. Additionally, if a non-compete is too broad or too long in duration, courts are likely to not enforce non-competes [4]. However, enforcement of non-competes is not so simple and a lot of that has to do with the fact that non-competes vary across state-lines and are judged on a case-by-case basis [5].

It is important to take a closer look at the way many states decide to enforce non-competes. Otherwise, decisions made in court can in the long term put low-wage workers at risk if there is too much variability in court decisions. The first issue is that some states will enforce non-competes and others will generally not such as Oregon, Hawaii, and Illinois [5]. For states that do enforce non-competes, enforceability is guided by “(1) whether an employer’s legitimate business interest exists; (2) whether the geographical scope is reasonable; (3) whether duration is reasonable; (4) whether adequate consideration exists; and (5) whether the non-compete violates the public policy or imposes undue hardship on the employee [4].” Yet, even with these basic guidelines defining a legitimate business can depend on the case. Additionally, there is ambiguity when it comes to defining what is a “reasonable” length and geographical area.

A legitimate business interest can be proven through significant employee training, employee access to a business’s trade secrets or confidential information, and employee contact with customers [3]. When it comes to using training as a legitimate business interest, it’s not always clear how much training and what kind of training would count as a legitimate business interest. One example of training being used to demonstrate a legitimate business interest is the case of Milner Voice & Data, Inc. Here a legitimate business interest was found by the court since the employer was able to demonstrate $19,000 had been spent on sending the employee to a two-week training school in Arizona on several occasions [6]. While this may seem like a clear example, what about other cases where money is also invested but the training is not specialized? Training required for an employee to know how to make a sandwich or how to package items and ship them may not be a legitimate business interest, but if care is not taken in clearly defining specialized training then low-wage workers may be at risk. Therefore, one step courts can take is to set a cap on the amount of investment and type of training to avoid low-wage workers from falling into a case where a non-compete could be enforced. If employees are to be treated as a form of intellectual property, then the type of training, employee access to confidential information, and employee contact with customers should be put up to the same scrutiny that intellectual property such as patents are exposed too.

Aside from properly defining a legitimate business interest, better care needs to be taken in determining what a “reasonable” time and geographical area are for a non-compete to be enforced. When determining the geographical area in which the non-compete is being applied to, “courts will typically look at the location of the business and the surrounding areas that may affect the business if the employee were to begin working for a competitor or start a similar business. [6].” Since geographical location can be tricky, determination of this factor will vary case-by case. For example, in Premier Resources of North Carolina, Inc. v. Kelly, a non-compete was not shown to be too broad even though it restricted the former employee from working in nine counties throughout two different states [6]. While on paper it may seem overly broad, the court concluded it was not because “the court reasoned that upon review of the facts, there was sufficient proof to establish that the defendant had performed work in the counties listed on the agreement [6]”. What might even seem to be even more broad is the geographical limitation listed in the non-compete of a case in Virginia. In this case a former employee who worked for an employer who sold software applications was limiting its employee of all related business around the world. Here the court also upheld the restriction because it was found that “the nature of the business consisted of global reach because they were able to conduct business around the world [6].” Therefore, the lack of any geographical restriction was acceptable. Unfortunately, once again the variability in these cases make it possible for low-wage workers to be at risk. High-skilled workers may be able to relocate or shift positions in their field. However, low-wage workers may be detrimentally affected if they have to find jobs that are unreasonably far and quite possibly requiring them to restart their lives altogether in another state.

In a U.S economy where about seventy percent of the market value comes in “the form of trade secrets and other types of intellectual property” [4], it makes sense why employers would want to be extremely cautious and require most if not all its employees to sign non-competes. However, in order to avoid unfairly putting low-wage workers at a disadvantage, a cap on a minimum level of salary should be implemented. Also, certain professions should be considered to be excluded all together. However, in the case that a non-compete may still be necessary, employers should make sure the employee is fully aware of what he/she is signing and should provide an incentive to give the employee more leveraging power. Consideration of these factors should be part of determining whether a non-compete should be enforceable in order to strike a balance between the interest of the employee and the employer.

 

References:

[1] Norman D.  Bushara & Evan Starr, Business Law Fall Forum: The Incomplete Noncompete Picture, 20 Lewis & Clark L. Rev. 497 (2016)

[2] Orly Lobel. Companies Compete but Won’t Let Their Workers do the same. May 4, 2017.The New York Times. Opinion. https://www.nytimes.com/2017/05/04/opinion/noncompete-agreements-workers.html

[3] Sophie Quinton. These Days, Even Janitors are Being Required to Sign Non-compete Clauses. May 27, 2017. USA Today.

[4] Hui Shangguan, A Comparative Study of Non-Compete Agreements for Trade Secret Protection in the United States and China, 11 Wash. J.L. Tech. & Arts 405 (2016)

[5] Sharon K. Sandeeri & Elizabeth A. Rowe. Debating Employee Non-Competes and Trade Secrets, 33 Santa Clara High Tech. L.J. 438 (2017)

[6] Rachel Argenbright Rioux, The Necessity for Employer Liability in Unenforceable Non-Compete Agreements, 86 UMKC L.Rev.995 (2018)

Steven Hanson

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