Noncompetition and Nonsolicitation Agreements: Legal Tips and Potential Pitfalls

Some of a medtech company's most valuable assets walk out the door every evening without any guarantee they will come back the next morning: Technical people have knowledge of new product designs and features, sales employees know company marketing and pricing plans and may have close relationships with those who decide whether or not to buy the company's products, and supervisors know which hot buttons to push to persuade someone they supervise to jump ship and join a competitor.

Although medtech companies cannot stop an employee from quitting, they are increasingly trying to avoid suffering unfair competitive harm following an employee's departure by insisting on, and enforcing, noncompetition and nonsolicitation agreements.

The law governing noncompetes and nonsolicits is highly state-specific, and filled with pitfalls for the unwary. Whether you are considering using noncompetes and nonsolicits for the first time, considering how to react to a departed employee with whom you have such agreements, or thinking about hiring someone who comes with that kind of baggage, this article outlines some issues to consider.

State Law Governs—And Each State Is Different

Noncompetes are agreements that prohibit competing with a former employer in some way. Nonsolicits are agreements that prohibit luring employees away from a former employer. Both types of agreements are creatures of state contract law. In some states, there are specific statutes that address whether and under what circumstances such agreements can be enforced. In other states, there are no governing statutes and the law is an accumulation of appellate court decisions.

States differ dramatically in their approach to these agreements. In California, for example, noncompetes are essentially unenforceable unless they arise out of the sale of a business. If a former employer has highly valuable trade secrets that can only be protected by enforcement of a noncompete, a California court might be persuaded to enforce one, but they are otherwise almost always invalid there.

Most states outside California will enforce noncompetes, with varying degrees of enthusiasm. Minnesota is reasonably solicitous of noncompetes and large medical device manufacturers like Medtronic, Boston Scientific and St. Jude Medical explicitly choose Minnesota law in their noncompetes for that reason. Including a choice-of-law provision that says that the agreement will be interpreted in accordance with the law of a state that allows reasonable noncompetes—so long as there is some connection between that state and the performance of the agreement—is a wise idea.

Nonsolicits are generally easier to enforce than noncompetes because generally they do not stop an employee from taking a new job with a competitor. Even in California, nonsolicits are generally enforceable. But, from an employer's perspective, stopping a former employee from recruiting people he or she supervised to join a competitor is usually far less important than stopping the employee from competing for sales or helping in the development of competing products. You need a noncompete for that.

The Race to the Courthouse Matters

Regardless of what the agreement says about governing law, noncompete cases often turn on who fires first. The court in which a noncompete enforcement dispute is first filed has the presumptive "first crack" at being the court in which the dispute is resolved, even if a second case is filed elsewhere. The state's attitude toward noncompetes will influence a judge's thinking, even if the contract says the judge is supposed to be applying the law of another state.

Imagine a circumstance in which an employee signs a noncompete in New York that is governed by New York law (which generally enforces noncompetes), and then moves to California to take a new job with a competitor. Whether the former employer can enforce the noncompete may turn on whether a New York judge or a California judge is the one who makes the decision. The party who files first, and gets to a decision first, may well be the one who wins.

Consequently, a quick assessment of the situation and a willingness to act decisively either to enforce a noncompete or to get a determination that the noncompete is unenforceable, are critical to successful legal action. That legal reality may well align with the business reality that most of the competitive harm (or advantage) is experienced very quickly after an employee leaves. Speed is your friend.

Keep It Short and Sweet

The most critical objective in crafting a noncompete is to write something that will protect legitimate business interests without unduly burdening the employee. An employer might want a perpetual, intergalactic ban on its employees' working for a competitor, but finding legitimate business reasons for that kind of temporal and geographic restriction seems unlikely.

Judges will recognize overreaching when they see it, so an employer would be well-advised to consider only the necessary bare minimum—how long it takes to train a replacement, which accounts will really be at risk, the areas of technology in which an employee really has something critical—when crafting a noncompete. Rarely does the difference between a one-year and a two-year noncompete really matter to a former employer, but that difference can be critical when trying to explain to a judge that the restriction is reasonable and necessary.

Consider the Blue Pencil

When considering the enforcement of contracts, courts sometimes use the "blue pencil" doctrine to eliminate or modify offensive provisions without rendering the whole agreement unenforceable. Most states have a general reasonableness standard against which they measure the enforceability of noncompetes. As long as the agreements are not too restrictive in scope or duration, they are likely to be enforceable.

An agreement that might not be too long or too broad in most states can, however, run afoul of the law in a particular state. If a state uses the blue pencil doctrine, that extra length or breadth is not a problem for an employer—the judge just takes out his or her pencil and rewrites the agreement to a shorter or narrower term, and then enforces it.

States that will not use the blue pencil doctrine present a unique challenge for employers—and an opportunity for those burdened by a noncompete—because in such states the result is often counterintuitive: The more favorable the agreement is to the employer, the less likely it is that the employer will win. This is because a judge may see one aspect of the agreement that runs afoul of the state's law and, without a blue pencil, the judge must then throw out the whole agreement.

If California is not an option, the next best state for someone trying to avoid a noncompete is one without a blue pencil—such as Wisconsin. A Minnesota employer looking to hire a Wisconsin resident who is burdened with a problematic noncompete might well consider having the employee file a preemptive declaratory judgment in Wisconsin against his or her former employer to void the noncompete.

Give Due Consideration

Beyond the scope of the noncompete, the most critical issue in terms of enforcement is whether there was adequate consideration for the agreement. "Keeping your job" might pass as adequate consideration in some places, but the most conservative approach is to have the employee sign the noncompete when they first obtain a position that requires it. In the absence of a promotion or other job advancement, even a cash payment may not be enough consideration to support the noncompete.

Obviously this situation makes it hard to roll out noncompetes in a business that has never had them. Rather than trying to go from zero to 100 percent overnight, a prudent employer might institute a practice of phasing in noncompetes over time by requiring them to be signed by new hires or when there is a promotion.

Consistency Is the Best Policy

Enforcing noncompetes is important. Like military deterrence, however, what is more important is that everyone knows that you will enforce them. That knowledge keeps competitors honest, and prevents your employees from having a wandering eye in particularly dangerous situations. The prudent employer lets everyone know that it considers its noncompetes a high company priority, and regularly reminds the employees of the existence and importance of them. Such regular notices also present an opportunity to make a clear and persuasive record of why the noncompete exists, which can later be used in court.

Should someone be "liberated" by the competition, prudence dictates a quick and decisive response. No judge will grant an injunction to enforce a noncompete when the employer doesn't seem to need one, and nothing shows a lack of urgency more profoundly than waiting weeks to do something about a scofflaw.