Les Préludes

A. Your writing is your mind walking naked across the page.

B. What the wheel is to the world of mechanics, grammar is to the world of writing - especially the writing of contracts.

C. The task of transactional attorneys is to place commercial litigators on the endangered species list.

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An article published in the Sunday, May 14, 2017, Business Section of The New York Times, "Losing the Right to a New Job," decried, quite properly, the extension of non-compete provisions to middle-level employees.

I say "quite properly" because in my own practice I have noticed an overly aggressive use of these clauses by employers and a lazy (or perhaps desperate) acceptance of them by employees: Too often the protection is not styled to fit the risk.

By way of example, I recently represented a doctor joining a medical practice. The employment agreement prevented the doctor from practicing medicine within a specified geographical area for a period of three years after termination of his employment. That draconian clause would have hamstrung the doctor's ability to earn a living following termination of his employment, which the employer had the right to terminate without cause on 60 days' notice.1 So we pointed out to the employer that (1) it gained no protection from that clause because it was subject to competition from other practices in the area and that there were myriad other doctors in the field those other practices could hire, and (2) it had the protection it needed by the clause preventing its employees from soliciting its patients.

The prospective employer agreed, and we worked out a solution that allowed my client to work for other practices in the area but precluded him from opening his own practice in that area for a specified period.

On the other hand, a client, a multinational company in the oil and gas and transportation industries, recently hired a new CEO. The contract we prepared contained what I call the usual internal protections:

(1) prohibition, without restriction as to time, from using and disclosing to others trade secrets and other proprietary information;

(2) a prohibition, for a limited period, from soliciting employees of the company; and

(3) a prohibition, for a limited period, from soliciting customers of the company.

Given the industries involved and the nature of the client's business, we saw no reason, following termination of the executive's employment, to restrict his employment with other companies.

* * *

These two anecdotes delineate the two main features of the non-compete clause: (a) internal protections respecting proprietary information, employees, and customers; and (b) what I would call an external protection against working for competitors.

The internal protections are entirely reasonable and proper in all situations and regardless of the rank of the employee. First, trade secrets and other proprietary information belong to the company, so to use or to disclose them elsewhere without the company's consent would amount to theft. Second, the company has a legitimate interest in protecting its employees and its customers from being diverted by one who has gained knowledge of them by virtue of his or her association with the company.

However, the prohibition against working for competitors is another matter. The article in the Times focused, in part, on the anti-competitive nature of the restriction. What concerns me more, though, is harm to the individual who is precluded from earning a living. An executive whom the Times article quoted argued that, regardless of the level occupied by the employee, the restriction on working for competitors was an essential prophylactic because of the difficulty and expense involved in detecting violations of and enforcing the provisions designed to protect the company's trade secrets. But there is limited logic to this argument because the restriction on working elsewhere must, by law, be for a limited period only, so ultimately the company must rely on the unlimited protection against the use and disclosure of confidential information. Further, the restriction is just too great a risk to take and too high a price to pay for a job for most people working to support a family. And from a competitive point of view, the restriction is of questionable value when applied to employees who have jobs populated by a host of comparable, competing workers.

The external protection should be limited to those few high level personnel who are crucial to the business; and in some cases, as revealed by the anecdote above, it may not even be necessary or appropriate.

It is essential that the employer and prospective employee consider and examine these clauses in context to determine what is reasonably necessary and appropriate under the circumstances. Initially, it is incumbent upon the attorney for the employer and its client to engage in these considerations before writing, rather than robotically plugging into an agreement a standard form, hoping that the other party will accept it "as is."

There is no shame in writing a fair agreement. It promotes respect and trust, which are qualities that every business should seek to develop in its employees.

* * *

Before concluding this brief but riveting dissertation on the non-compete clause, there are a few refinements to consider.

With regard to the internal protections, depending on the circumstances and the period of the restriction, it might be appropriate to limit solicitation of employees and customers to employees and customers of the company existing at the time employment terminates.

With regard to a prohibition on employment elsewhere, that prohibition should never apply if the employee leaves because of a material breach of the agreement by the employer or if the employee is terminated without "proper cause." But these two exceptions should never apply to the internal protections.

Mercifully, I will not try your patience or bore you with a definition of "proper cause," though you can find a model in the article "Termination, Evergreen, and Severance Clauses, and Some Warnings" that appeared in the October 2017 issue of the Journal.

  • We made that clause bi-lateral, so my client had the same right to terminate without cause on 60 days’ notice.