Non-Compete Contracts Imposed on Employees: Enforceable or Not?

Author’s Note:

When I drafted this article in June, the outcome was not clear for a Connecticut General Assembly bill that would codify some non-compete provisions in employment and other contracts.

The General Assembly passed, and Gov. Dannel P. Malloy signed, Public Act 16-95, which became effective July 1, 2016. This act specifically addresses covenants not to compete in employment contracts and other contracts and agreements entered into, amended, extended, or renewed on or after the effective date of the act, between physicians and their employers.

The act also covers non-compete provisions in partnership agreements and other “professional relationship agreements.” The act prohibits language in these contracts and agreements that would have the effect of restricting a physician’s competitive activities for a period of more than one year in a geographical region of more than fifteen miles from the “primary site where such physician practices.”

In other words, with regard to physicians, the act prohibits non-compete provisions that last more than one year or purport to prevent a physician from competitive practice beyond fifteen miles from his or her primary place of practice. A non-compete provision that prevents a physician from practicing competitively within fifteen miles from the primary site is valid and enforceable as long as the non-compete provision is effective for no more than one year.

As of now, since the General Assembly is not considering any legislation that would protect other classes of employees, my comments regarding covenants not to compete remain unchanged.

The Original Post:

Ongoing concerns about the strength of the U.S. economy signal the likelihood that some companies will continue to shed jobs as they recalibrate to move forward—and that means a new wave of professionals will confront the effects of non-compete clauses.

Employment contracts and separation agreements are prepared by employers and, not surprisingly, generally contain provisions intended to protect the employer and the employer’s business.

Attorney Robert L. Fisher

Attorney Robert L. Fisher

Professionals who are joining or leaving a company are typically prohibited from disclosing the employer’s trade secrets, intellectual property, customer or client lists, product specifications, and other information deemed proprietary. The reasonableness of such limitations isn’t difficult to understand or accept.

However, most employment contracts also contain some form of a covenant prohibiting an employee from competing against the employer—even if the employee is retiring or resigning, or is being fired.

Wait a second: a mid- to upper-level manager who is resigning can’t improve his or her life by take a better job with a direct competitor? Isn’t that how you succeed in the business world, by moving around to move up?

Even more difficult for many to understand is how an employee whom a company devalues enough to fire can also be handcuffed by the terms of a typical non-compete clause. (Wouldn’t the employer want such an employee to go to a competitor, a cynic might wonder.)

Nevertheless, a non-compete provision typically prohibits a former employee from going to work for another employer who is a competitor of the employer, and usually prohibits the former employee from hiring other employees from his former employer. Some non-compete provisions preclude a former employee from starting his or her own business in competition with his former employer.

The strict nature of non-compete clauses might seem unreasonable enough to suggest that their primary function must be to serve as a deterrent, and that those willing to test the will of the former employer are unlikely to face action. However, that is not the case.

There have been a number of lawsuits brought by employers against former employees who have allegedly violated non-compete provisions in their employment contracts. Some non-compete provisions are upheld, and some are found to be invalid. Recently, for example, a federal district court judge found a non-compete provision to be void and unenforceable because it was “unrestricted in geographical scope.” The provision was to be effective for two years, and it would have prevented the former employee from working in his field anywhere in the world. The court’s decision emphasized that the non-compete provision would have prevented the former employee from pursuing his occupation for a period of time that was manifestly unfair and against public policy.

When considering the reasonableness of a covenant not to compete, courts may consider:

  • The length of time the covenant will be in effect.
  • The geographical area within which the former employee is prohibited from working.
  • The fairness of protection to the employer.
  • The extent of the restraint on the former employee’s opportunity to pursue his occupation.
    The extent of interference with the public’s interests.

Most employees in Connecticut don’t have contracts and are considered “at-will” employees, meaning that employers can terminate their employment for any non-discriminatory reason at any time.

For those employees who are subject to contractual non-compete clauses, every case is different. The nature of employment is a factor in the enforceability of a non-compete provision, and when cases go to court, two key aspects under scrutiny are the time duration and geographic limitations imposed in the non-compete clause. The level of hardship imposed on an employee is a key test.

If you are either an employer or employee about to be subject to an employment contract, we advise consulting with an attorney to evaluate the enforceability of the contract and its non-compete provisions.

Attorney Fisher’s areas of specialization include wills, living wills, real estate closings and land-use matters. He works primarily in Cramer & Anderson’s Washington Depot office and may be reached at (860) 868-0527, or by email at rfisher@crameranderson.com.