John Borrowman, CPC
Borrowman Baker LLC
If your career focus is in business valuation, you’re in one of two categories. You’ve either already signed a non-compete agreement, or you’ll be expected to at some point.
Are they enforceable?
It seems like everyone you talk to has a different answer. We reached out to James Crumlin, Jr., an attorney specializing in employment-related litigation with Bone McAllester Norton PLLC, in Nashville, TN.
Borrowman: When you’re being asked to sign a non-compete agreement it goes without saying that you should turn to an attorney, right?
Crumlin: Yes, you should. And you don’t want to rely on your former college roommate who now practices law three states away. You want an attorney who practices employment law in your state and, preferably, one who practices in your jurisdiction so as to be familiar with how courts have ruled.
Borrowman: How should you start to look at the non-compete so you can better evaluate it?
Crumlin: The first thing I would take a look at is the time, place, and manner of the non-compete provision; meaning how long does the non-compete provision last if you leave your employer, what are the geography prohibitions, as well as the manner and how it restricts you. Does it mean you can’t compete in the same industry? Does it mean you can’t go after the same clients? Those are all things you want to consider when you’re trying to decide whether to sign.
Borrowman: Once you’ve taken a closer look, where do you begin to seek out negotiating points?
Crumlin: The first negotiating point would be the time restriction. Some employers will put one year or two years. I’ve seen non-compete provisions as long as five years. You want to negotiate to less than a year, or to get it removed altogether. Though most employers will stand pretty firm on having some time restriction.
Most agreements define “place” as a particular radius from your employer’s place of business. A twenty-five mile radius may not sound like a lot. However, if your employer’s office is downtown in a mid-sized city, that twenty-five mile radius can block you out of the market altogether.
When it comes to “manner”, you want to be able to maintain access to your own contacts. If you bring your contacts with you to a new job, you can sometimes negotiate a “carve-out” that protects your access to those contacts should you leave the employer. Contacts you make while you’re at this new employer can be tricky. On the one hand, you made the contacts. On the other, you made the contacts while using your employer’s brand. This is where time, place and manner converge. For example, you might try to negotiate one length of time for the overall non-compete and a separate – perhaps longer – length of time regarding contacts you make while at the employer.
Borrowman: It’s easy to assume that the more onerous the restrictions, the less enforceable the agreement. Is there a correlation?
Crumlin: Not necessarily. Some courts will enforce the time, place and manner restrictions and some won’t. Some courts might say that twenty-five miles is okay. Some might say that ten miles is too much. That’s why you really need to take a look at the agreements on a case-by-case basis. When considering whether a covenant is reasonable, the Court usually weighs four factors: (1) consideration supporting the covenant; (2) the threatened danger to the employer in the absence of the covenant; (3) the economic hardship imposed on the employee by the covenant; (4) whether the covenant is inimical to the public interest. When considering the reasonableness of time and territorial limits, the Court requires that they must be no greater than necessary to protect the business interest of the employer. A higher level of scrutiny is applied when public policy issues are implicated by a covenant.
Borrowman: Let’s say that you leave an employer where you’ve had a non-compete agreement. What ammunition does your employer have that he can use?
Non-compete agreements usually provide your employer with a range of options. First, there are actual damages, which refer to revenue the employer actually lost when you violated the agreement. Second, your employer can seek nominal damages, which recognize that you did violate the agreement, but the violation wasn’t that bad. Last, an employer may seek liquidated damages, which can be quite steep and are usually intended as a disincentive to leave. Some agreements also provide for injunctive relief which could force you to find a different line of work.
Borrowman: Is the non-compete agreement really enforceable when the only consideration in the contract is “you get to keep your job”?
Crumlin: The employer will likely argue that the consideration is “we’re going to give you a job”, or “you get to work for us”. Again, this is a question that only the Court can answer.
Borrowman: In the end, it just comes down to a decision sign or not. Right?
Crumlin: Right. Because the basic answer to all these questions is: It depends.