Three Issues In-House Counsel Should Raise Before Asking Employees to Sign Non-Competes

While many employers take comfort in knowing that some or all of their employees have agreed to non-compete covenants, obtaining and enforcing such agreements does not come without costs.  As such, it is important for in-house counsel to explore with their business clients whether it really makes legal and economic sense to seek such agreements.  Among the issues you may want to raise are the following:

Issue # 1: How Likely is it that the Contemplated Non-Compete Would Be Enforceable?

Most in-house counsel who have had any dealings with non-compete covenants know that if such a covenant merely limits competition, it is not enforceable.  Because many business clients do not have a clear understanding of this counterintuitive principle, in-house counsel can save a lot of future angst if they make sure that the business people know right from the start that a non-compete covenant only is enforceable if it is necessary to protect confidential information, goodwill or trade secrets.  Indeed, because there are many situations in which none of these three interests will be protected by a non-compete, if your client knows this up front, s/he may decide that it is not worth the time and expense to even try to obtain such an agreement from company employees.

Issue # 2: Is the Business Willing to Pay Extra Compensation for a Non-Compete?

Massachusetts, like a number of other jurisdictions, requires that an employee be provided with additional consideration as a predicate to a non-compete being enforceable.  While this may be easy to deal with for new hires, if you are asking an existing employee for a non-compete, the company must provide something in addition to what the employee already has a right to receive.  Merely promising continued employment, even if the employee is “at will,” may not be enough. 

Issue # 3: Is the Business Willing to Post a Bond in Order to Enforce the Non-Compete?

Seeking an injunction to enforce a non-compete usually is the only way to make a recalcitrant former employee live up to his/her covenant.  In this connection, a judge has wide discretion to order that an injunction preventing a former employee from working for a competitor only will become effective upon the payment of a bond.  Further, it often is the case that the amount of the bond will be equal to the former employee’s anticipated compensation with his/her new employer over the entire non-compete period. 

While bonding entities typically charge a 10% non-refundable fee to post such a bond, a company can avoid this fee by paying the gross amount of the bond directly into court.  Obviously, however, this can tie up valuable company resources.  Thus, while you can, and should, include in your non-competes a provision stating that the employee agrees that no bond will be required if an injunction is sought, be forewarned that at least one judge in the Federal District Court recently ruled that she was not bound by such a provision and required a $500,000 bond to be posted before her order enjoining the former employee would become operative.

Discussing these issues with your business counterparts before they ask for non-competes at least will keep them from being surprised later on if it turns out that such non-competes are unenforceable and/or only will be enforced if a large bond is posted.  And, as we all know, in-house counsel never want to reveal such surprises.

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