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Maintaining Options for Low-Income Workers

How to Defend Clients Against Noncompete Agreements

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The various ways employers can harm their employees seem to have no end: from making illegal deductions, to failing to provide workers’ compensation coverage, to discriminating on the basis of membership in a protected class. Until recently, however, most employees could breathe more easily after leaving a problem job. Not so now. With the growing trend of requiring workers to sign noncompete agreements, employers maintain control over their former employees’ lives for years after the employment relationship ends.

Noncompete agreements, also known as covenants not to compete, generally include a restriction on employees’ taking similar employment within a specified geographic area or a particular time frame or both. The agreements may limit the employees’ ability to use information learned or obtained during their employment or restrict them from opening a competing business.

Once the purview of technical and scientific workplaces, noncompete agreements have spread rapidly throughout low-wage industries in recent years. Many people have heard about Jimmy John’s, the sandwich chain that used to require its employees to sign agreements preventing them from working for a sandwich shop within two miles of their former employer for two years.1 What people may not know is that these agreements are becoming ubiquitous in low-wage industries across the country, with nearly 14.3 percent of workers without a college degree now signing them.2

Once the purview of technical and scientific workplaces, noncompete agreements have spread rapidly throughout low-wage industries in recent years.

Noncompete agreements make it difficult for workers to negotiate with employers for better working conditions. If, for example, a competitor pays higher wages, an employee may not be able to use that information to ask the current employer for a raise since the employer knows the noncompete agreement could make it unlikely for the competitor to hire the employee. Knowing that if they are fired, their employment opportunities are limited, employees subject to noncompete agreements may also be reluctant to rock the boat.

Noncompete agreements are a particular burden for low-income workers who have less access to transportation to accept work outside any geographic restrictions imposed by a noncompete agreement and who have fewer skills to be able to find work in a different industry.3 Employees with limited English proficiency or low levels of education may not understand what they are agreeing to when they enter into such agreements, and they often do not have the bargaining power to negotiate with the employer requiring them to sign. Because of these particular burdens on low-income workers, legal aid providers should consider expanding their practices to assist workers defending against enforcement of noncompete agreements.

Learn the Law of Noncompete Agreements

While the law around covenants not to compete varies from state to state, generally speaking a covenant will not be found to be valid unless it is in writing, is part of an employment contract, is based on valuable consideration, is reasonable as to time and territory, and does not violate public policy.4 The burden is on the employer to demonstrate that a covenant not to compete meets these criteria and is lawful.5 While the elements of a valid covenant not to compete are generally set forth in case law, your state’s statutes may contain some requirements as well.6

In many states, courts will rewrite noncompete agreements to make them acceptable, while, in others, a single unenforceable provision results in the court’s throwing out the entire agreement. Some states follow the blue-pencil doctrine, in which the court, while refusing to enforce any impermissible sections, will allow the enforcement of acceptable parts of an agreement.7

Know Your Facts

Although noncompete agreements are becoming more common in all manner of industries and jobs, the specific facts of your client’s situation matter tremendously in how you defend the case at both the preliminary injunction and the merits stages.

Circumstances of Entering into the Covenant 

Where an employee did not sign the covenant not to compete at the start of employment, there must be adequate consideration for the covenant to be valid. Such consideration could include a change in pay, job duties, or type of employment. Generally courts will not find continued at-will employment, absent anything else, to be sufficient consideration for a covenant to be valid.8 Additionally, if the employer cannot produce a copy of the signed agreement, you may be able to get the claim dismissed.9

Job Responsibilities 

You will want to explore all of your client’s job responsibilities and the names of any customers or clients with whom the client worked. Noncompete covenants are more likely to be upheld where the employee, such as a medical professional, has specific training or skills. If the employer has invested in training for the employee, that may weigh in the plaintiff employer’s favor. If the employee’s job was unskilled, a good argument is that a noncompete agreement violates public policy, as discussed below. Find out exactly where your client worked as well as where the employer operated so that you can determine whether any geographic restrictions imposed by the covenant are reasonable. An agreement designed to protect the employer’s customer base, for example, should not extend beyond the area where the employee was in contact with customers.10

Access to Information

Find out from your client whether the client had access to any information that could potentially be deemed to be confidential, including customer or client information, technical information, or pricing. Access to such information will be important in determining whether you have a valid argument that the noncompete covenant violated public policy, as well as whether your client can easily defend against related claims such as misappropriation of trade secrets.

What Is Restricted?

Frequently employers require employees to sign, in addition to an agreement not to compete, agreements not to solicit customers or to recruit employees. Again, the facts matter. If the employee is prohibited from recruiting other employees for any kind of work, not just the kind of work previously performed for the plaintiff employer, for example, the nonrecruit agreement may be broader than necessary to protect the employer’s legitimate interest.11 The same is true if the nonsolicitation agreement applies to customers or clients for whom the employee never performed work while employed by the defendant.12

Timeline 

Pay attention to the time frame covered by the noncompete agreement. You may have an argument that the time period is unreasonable, especially if the employee did not have a top position in the company. The duration should not be longer than what is needed to protect the employer’s interests.

Most cases about covenants not to compete involve a motion from the employer for a preliminary injunction.13 If some time has passed since your client left the employment, consider whether the employer will be able to show irreparable harm from the breach. Why did the employer wait to bring a claim of breach? Is it possible that the employer has not been injured by your client’s actions? Depending on your jurisdiction, you may be able to argue that any injunction should be started from the date of termination rather than the date of the court’s order.

Breach 

Consider the possibility that your client has not done anything close to breaching the noncompete covenant. Especially where the employer has brought claims against multiple former employees at once, the lawsuit might be being used solely as an intimidation tactic against current employees, and your client did not violate the agreement.

Argue Public Policy

Your state may have a public-policy exception for covenants not to compete. If this is the case, the employer must show a strong enough interest in the covenant to overcome the public interest of promoting competition and the employee’s interest in earning a living. In the words of the North Carolina Court of Appeals, “the restraint is unreasonable and void if it is greater than is required for the protection of the promisee or if it imposes an undue hardship upon the person who is restricted.”14 If the hardship to the employee outweighs the employer’s need, the covenant is in restraint of trade.15 To support your argument, look for language in your state constitution or statutes that sets forth a state policy in favor of employment mobility, the right to work (this typically appears in statutes as a way to limit union organizing but may also be more broadly expressed in a state constitution), or freedom of competition.16

Unskilled Workers

The public-policy argument is stronger when the worker is unskilled, as covenants not to compete particularly burden these employees. A handful of cases have so held.17 But do not disregard cases where covenants have been upheld; contrast the factual circumstances of those cases with your client’s situation.18 Unskilled employees are unlikely to possess the type of information or knowledge that an employer needs to protect:

[Defendant employee] was an at will employee … who did not have access to any sensitive information, received no training, and received compensation (without benefits) only slightly above minimum wage. Under these circumstances the balance of the equities weighs against enforcement of the noncompetition agreement. Enforcing the agreement would work serious hardship on [defendant employee] and discourage him from seeking better employment and greater security for his family elsewhere.19

Employer’s Unfair Actions

You can argue a public-policy violation if the employer is attempting to enforce the agreement under circumstances where the employer has acted unfairly. For example, some states limit the enforceability of a noncompete covenant against an employee who was terminated or where the employer violated the employment agreement.20

Overbreadth

You can also look for overbreadth arguments, as courts often merge the issues of the breadth of the covenant with public-policy concerns. Even where the employer can make a showing that it has an interest strong enough to overcome the combined interest of the employee’s need to earn a livelihood and the public interest in competition, the covenant must be narrowly drawn in terms of time, territory, type of work covered, and other factors so that it does not cause undue hardship and is not more restrictive than is required to protect the legitimate interests of the employer.21

Territory

Where the geographic reach of the agreement is broader than is necessary, the covenant is void.22 In determining the reasonableness of the geographic scope of a covenant not to compete, the courts may consider “(1) the area or scope of the restriction; (2) the area assigned to the employee; (3) the area where the employee actually worked; (4) the area in which the employer operated; (5) the nature of the business involved; and (6) the nature of the employee’s duty and his knowledge of the employer’s business operation.”23

Type of Work

You may argue that the restriction is overly broad where your client is restricted from engaging in work that is different from the work performed for the former employer.24

Customer Relationships

The North Carolina Court of Appeals held that a temporary staffing company’s covenant not to compete violated public policy because it prohibited employees from accepting employment not only with existing customers of the staffing company but also with customers with whom the staffing company had severed its relationship.25 A restriction on working for any customer of the former employer, regardless of whether the employee worked for those customers while employed by the employer, is also vulnerable to an argument that it violates public policy.26

Be Prepared for Accompanying Claims

Your client is likely going to be hit with a slew of other claims associated with the alleged violation of the covenant not to compete. This is particularly true where the employer is suing multiple former employees rather than a single individual. Before proceeding to represent the entire group, you will need to do a careful assessment of any conflicts and obtain any necessary waivers. Some claims to expect are tortious interference with contract, misappropriation of trade secrets, unfair and deceptive trade practices, and civil conspiracy.

In most cases, the factual development that you need to defend against the covenant-not-to-compete claim will help you with the other claims. For example, to prevail on a tortuous-interference-with-contract claim, which would occur where one person left the employer to start a competing business and then hired former coworkers, the employer will probably need to prove that your client (the third party) acted without justification, and this includes consideration of the circumstances, the motive and conduct, and the interests at issue.27 The evidence you have compiled to show your client’s interest in earning a living is helpful in demonstrating a legitimate business purpose in hiring your client’s former coworker to work in your client’s new business.28 The employer will also need to show that your client actually induced the breach of contract. Of course, if you can show that the underlying contract was invalid, or that there was no underlying contract, there is no claim for tortious interference with that contract.

Your client is likely going to be hit with a slew of other claims associated with the alleged violation of the covenant not to compete.

In defending a misappropriation-of-trade-secrets claim, you need to develop the factual record around the identification of the exact trade secrets allegedly misappropriated and the acts by which they were misappropriated. If the employer cannot provide more than conclusory allegations or specifically identify the secrets allegedly misappropriated, you are in a strong position to argue that there was no violation.29 Additionally, if the supposed trade secrets at issue are not highly technical or business information that would be reasonably considered to be secret, or if they are information that your client knew before coming to work for that employer, you may be able to get that claim dismissed at the outset.30 Factors that courts may consider in determining whether something is a trade secret include the extent to which the information is known outside the business, extent to which it is known inside the business, measures taken to guard the secrecy of the information, value of the information to the business and its competitors, amount of money or effort expended in developing the information, and ease with which the information could be acquired or duplicated by others.31 You may need the services of an expert to establish the facts you need to defend against a trade-secrets claim.

Sometimes clients may possess information such as customer lists that could legitimately be considered to be a trade secret under certain circumstances. You will want to explore whether your client was involved in marketing or customer relations or whether your client possessed information about customer bidding and pricing. Just because the former employee had direct contact with customers does not mean that the former employee possesses information that is not available to the public.32 The plaintiff must also show more than that the former employee possesses knowledge and information beneficial to the employee’s new employer; the plaintiff must demonstrate that the information was misappropriated and that the misappropriation was the proximate cause of injury to the plaintiff.33

An unfair-and-deceptive-trade-practices claim generally will require egregious facts. A mere breach of contract is not sufficient.34

Look for Counterclaims

When representing workers in any type of employment case, you must explore whether they may have experienced violations common in low-wage industries. Ask to see your client’s pay stubs, and check to see whether the information found there matches your client’s reported hours worked. Look for potential unlawful or unauthorized deductions. Make sure the client was earning overtime if the client was entitled to it. Ask whether your client was ever not paid for work performed or whether payments were ever delayed. A common example of unpaid work time is travel time between worksites. You should also interview your client about possible discrimination or retaliation claims and work-related injuries.

Asserting counterclaims gives your client additional leverage in the lawsuit. Even where the employee’s counterclaims are limited by an applicable statute of limitations, the employee may be able to bring counterclaims in recoupment to offset any damages awarded to the employer.35

Think About Media

Unless your client was employed in an industry that has traditionally made use of noncompete agreements, the employer may be assuming that the former employee will immediately back down in the face of litigation. Your client’s story of fighting back against a noncompete agreement, related to a well-vetted media outlet and related in conformity with ethical rules, could help discourage other low-wage employers from making use of noncompete agreements in the future.

Many states are considering, or have already passed, legislation to restrict the use of noncompete agreements. California, Oklahoma, and North Dakota, for example, will not enforce most noncompete agreements.36 Utah, Michigan, and Massachusetts are contemplating similar bans.37 Your litigation, and your client’s personal story, can be powerful examples of why states should consider limiting noncompete agreements. Be wary of including a confidentiality agreement in any settlement that might inhibit your ability, or your client’s ability, to discuss the case publicly.

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Successfully defending low-wage workers who have signed noncompete agreements does not simply help clients avoid paying damages to their former employer. It provides workers with job mobility that they may desperately need. Winning declaratory relief, such as a decision that a noncompete agreement violates public policy, and gaining publicity on the harm of noncompete agreements on low-wage workers are important victories in the fight for worker justice.

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