Non-compete clause disputes are common in employment contracts, where such clauses are often included. A non-compete covenant typically aims to restrict an employee from working with a competitor or starting a competing business for a specified period and within a certain geographical area after leaving the company. Disputes can arise in various forms, such as:
Scope and Reasonableness
Disputes involving the scope and reasonableness of a non-compete clause are common in employment contracts. These disputes arise when a party believes that the non-compete terms are excessively restrictive. The main areas of concern typically involve the duration of the non-compete, the geographical area it covers, and the extent of the activities it prohibits.
For example, a non-compete that prevents an employee from working in any similar role nationwide for several years might be considered unreasonable and overly broad.
These clauses need to be balanced; they should protect the employer’s legitimate business interests without unduly restricting the employee’s ability to find future employment. Courts often scrutinize such clauses to ensure they are fair and not overly oppressive.
Enforceability
The enforceability of a non-compete agreement is another frequent point of contention. The enforceability largely depends on the specific laws of the state where the dispute arises, as different states have varying standards for what constitutes a valid non-compete agreement. Some states are more employee-friendly and impose stricter limitations on non-compete agreements, only enforcing them when they are narrowly tailored to protect specific business interests, such as trade secrets or unique customer relationships. Other states may take a more employer-friendly approach.
The specific terms of the agreement also play a role in determining its enforceability. Courts typically look for clear, precise language and reasonable terms in terms of duration, geographic scope, and the nature of the restrictions.
Breach Allegations
Breach allegations in non-compete agreements typically involve an employer accusing a former employee of violating their agreement by engaging in prohibited activities, such as working for a competitor or starting a competitive business. These allegations can lead to legal proceedings where the employer seeks to enforce the non-compete clause. This is often done by requesting an injunction to prevent further breach and possibly seeking monetary damages.
The accused party, usually the former employee, may challenge these allegations by arguing that their new employment or business venture does not fall within the scope of the non-compete agreement. The defense might hinge on demonstrating that the new role does not conflict with the specific terms of the non-compete or that the nature of the new employment is sufficiently different from the former role to fall outside the agreement’s restrictions.
It is important to note that there are new federal laws governing non-compete clauses which will apply near the end of 2024, which will be discussed at the end of this article.
What Are the Legal Penalties for a Breach of a Non-Compete Clause?
The legal penalties for breaching a non-compete clause can vary, but they often include:
Injunctions
Injunctions are a common legal remedy in disputes involving non-compete agreements. When a court issues an injunction in the context of a non-compete clause, it orders the former employee to stop certain activities that are in violation of the agreement. This could include working for a competitor, starting a competing business, or any other activity restricted by the non-compete clause.
The purpose of an injunction is to prevent ongoing or future harm to the employer’s business interests that could result from the former employee’s breach of the non-compete. To obtain an injunction, the employer must typically demonstrate that they are likely to succeed on the merits of their case and that they are likely to suffer irreparable harm if the injunction is not granted.
The court will also consider the balance of harms – how the injunction would affect both parties – and the public interest. Injunctions are particularly important in non-compete disputes as they offer a swift means of stopping actions that could significantly and immediately negatively impact a business.
Financial Damages
In cases where an employer can prove that a breach of a non-compete agreement has resulted in financial loss, they may be awarded monetary damages. These damages are meant to compensate the employer for the economic harm suffered due to the breach.
Calculating these damages can be complex, as the employer must demonstrate not only that the former employee violated the non-compete clause but also that this violation directly led to a quantifiable financial loss.
This loss could stem from a variety of factors, such as loss of clients or customers to the former employee, loss of trade secrets, or other forms of unfair competition. The amount of damages awarded will depend on the extent of the loss and could include lost profits or additional costs incurred by the employer in mitigating the damage.
Legal Costs
In many non-compete disputes, the party found to be in breach of the agreement may be required to pay the legal costs incurred by the other party in enforcing the agreement. This can include attorney’s fees, court costs, and other expenses related to the lawsuit.
The imposition of legal costs on the breaching party serves as a deterrent against violating non-compete agreements and also helps to compensate the non-breaching party for the expenses incurred in protecting their legal rights. However, the awarding of legal costs can depend on several factors. These include the specifics of the case, the terms of the non-compete agreement, and the laws of the jurisdiction in which the case is heard.
In some instances, if the court finds that the non-compete agreement was overly broad or unenforceable, it may not require the breaching party to pay these costs.
Are Non-Compete Clauses Allowed in All States?
Non-compete clauses are not uniformly treated across all states. Some states, like California, largely prohibit non-compete agreements except in very specific circumstances. Others may enforce them but apply strict scrutiny to their terms to ensure they are reasonable and not overly restrictive. The enforceability of non-compete clauses is subject to state laws and the interpretation of these laws by courts.
What Are Some Remedies for Non-Compete Clause Disputes?
Remedies for non-compete clause disputes can include:
Negotiation and Mediation
In many non-compete clause disputes, negotiation and mediation are the first steps taken before resorting to legal action. These processes involve discussions and bargaining between the parties to find a mutually acceptable resolution. In negotiation, both parties, often with the aid of their legal representatives, communicate directly to try and settle their differences. They may discuss altering the terms of the non-compete to make them more agreeable to both sides.
For example, they might agree to reduce the geographic scope or duration of the non-compete.
Mediation involves a neutral third party, a mediator, who facilitates discussions between the disputing parties. The mediator helps them explore potential solutions and reach an agreement, but unlike a judge or arbitrator, does not make a binding decision. Mediation can be particularly effective as it allows for creative solutions tailored to the specific situation and needs of both parties. It’s a collaborative process that can preserve and sometimes even improve the relationship between the employer and former employee.
Modification of the Clause
When non-compete disputes reach the courts, one possible outcome is the modification of the non-compete clause. This process, often called blue-penciling, involves the court altering the terms of the non-compete to make them more reasonable and enforceable. Courts generally do this when they find that some parts of the non-compete are valid, but others are overly broad or oppressive.
The modification might involve:
- Reducing the length of time the non-compete is in effect.
- Narrowing the geographic area in which it applies.
- Limiting the scope of activities it prohibits.
This judicial adjustment aims to balance the employer’s interest in protecting their business with the employee’s right to work and earn a livelihood. However, not all states allow for the modification of non-compete clauses, and in some jurisdictions, if any part of the non-compete is found to be unreasonable, the entire clause may be voided.
Monetary Compensation
In cases where a breach of a non-compete clause occurs and results in financial loss, the aggrieved party may seek monetary compensation. This compensation is intended to cover the losses incurred due to the breach.
For example, an employer could sue a former employee for breaching a non-compete agreement and can prove that this breach led to a loss of business or clients. In this case, the court may order the former employee to pay damages equal to the lost revenue.
Conversely, an employee may successfully challenge an unreasonable non-compete clause and demonstrate that it has prevented them from earning a living. In this case, they may be awarded damages for lost wages. The amount of compensation will depend on various factors, including the extent of the financial loss and the specifics of the case. Monetary compensation in non-compete disputes serves both as a remedy for the harmed party and a deterrent against future breaches.
What Is the Most Recent Law Governing Non-Compete Agreements?
The Federal Trade Commission (FTC) voted to enact a new law governing non-compete agreements in April of 2024. This new law is referred to as the Non-Compete Clause Rule or Final Rule.
This new rule places a ban on nearly all types of non-compete agreements. The Final Rule will not be in effect until 120 days following the publication of the Federal Register containing the rule.
The Federal Register is a publication that includes the regulatory documents and rules that have legal effect and general applicability. This means that, although the Final Rule was voted into law, it will not take effect until approximately August 2024.
All employers will have to comply with this new rule after its effective date. This means that employers should begin preparing now for the implementation of this new rule.
Employers can prepare by consulting with their attorney or in-house counsel to ensure that they are in compliance with the new rule when it takes effect. It is important to note that there is one exception to the ban in the Final Rule.
The exception applies to non-compete agreements that were provided to a senior executive by their employer. This is allowed because agreements made with these types of higher-level employees are more likely to have been negotiated between the parties.
If a worker was not classified as a senior executive, any non-compete agreement entered into will not be enforceable after the Final Rule becomes effective. All employers will be required to provide workers who signed non-compete agreements with notice that these agreements cannot be enforced in the future.
How Does this Affect State Laws?
The Final Rule does not limit or affect the enforcement of existing state laws that place restrictions on non-compete agreements, so long as the state laws do not conflict with the Final Rule. Because the Final Rule is a federal law, it preempts state laws that conflict with it.
What if the Final Rule Is Challenged in Court?
It is very likely that the Final Rule will be interpreted by courts as time goes on. In addition, it will likely be challenged in court in the future.
The Final Rule does contain a severability clause, meaning that if a provision or application of the rule is invalidated or deemed unenforceable by a court, the rest of the rule will remain in effect. It may also be possible that the rule is entirely struck down at a future date.
Due to these issues, it is essential for employers who have workers who have signed non-compete agreements to consult with a lawyer to ensure that they are complying with the rule as updated. In addition, if an employer or employee is involved in litigation, they should be aware of the possibility of upcoming changes to the rule and the consequences they may have on their case.
The rules that applied at the time a case began will likely be applied when the case is decided. However, it is still important for clients to consult with their attorneys regarding the changes and possible changes to the rule so that the proper evidence can be submitted to a court to cover all possibilities.
This may allow a client to present their case in such a way that they can obtain a favorable outcome no matter whether the Final Rule is changed, eliminated, or upheld. It is essential for current clients to ask their attorneys to update them regarding the changing status of the Final Rule throughout 2024 and into the future.
Should I Hire a Lawyer for Help With a Non-Compete Covenant?
If you’re involved in a dispute over a non-compete covenant, hiring a non-compete lawyer is advisable. An attorney experienced in non-compete agreements and employment contracts can provide guidance. They can help interpret the agreement, assess its enforceability, represent you in negotiations or court, and ensure that your rights are protected.
For assistance in finding a qualified employment contract lawyer, consider using LegalMatch. We can connect you with attorneys experienced in employment law who can help with your non-compete agreement issue.
