Pros & Cons Of Non-Compete Agreements

By Mike Freed, attorney at Gunster

Three of the most valuable assets of businesses are trade secrets, customer relationships and employees. Non-compete agreements can be an effective tool to protect these assets. Under the right circumstances and when properly drafted and implemented, non-compete agreements are enforceable in Florida.

However, one size does not fit all when it comes to non-compete agreements, and there are pros, cons and limitations to their use. This article identifies some of the most critical pros, cons and limitations:

Pros

1. An effective agreement can prevent or impede employees from jumping ship and taking your customers with them – which can impair customer goodwill, the lifeblood of any business.

2. A competitor who hires an ex-employee under a non-compete can become liable for what is known as tortious interference. That is, employers make substantial investments in training employees in systems and processes and educating them on trade secrets and other proprietary and confidential information. When a competitor gains an unfair advantage by engaging an employee after such an investment is made, tortious interference may come into play.

3. A properly drafted non-compete agreement will discourage employees from leaving, joining competitors or starting competing companies.

4. Non-competes can curtail opportunistic behavior such as startup competitors who attempt to overcome certain barriers to entry in a market by picking off others’ key employees, complete with their industry and customer-base knowledge.

5. Preventing rogue ex-employees from competing helps the remaining workforce succeed without unfair competition. This allows employers to remain committed to maintaining a level playing field for their employees to succeed in sales, industry advancements and otherwise.

Cons and limitations

1. Non-compete agreements must be limited in time and geographic scope. A term of six months or less is presumptively reasonable, and over two years is presumptively unreasonable. Between six months and two years is a gray area, and the battle ground for litigation.

2. By statute, there must be a “legitimate business interest” underlying the agreement and the impacted employer/employee relationship. The business interest may not simply be to prevent competition.  To this point, a recent decision from Florida’s Fifth District Court of Appeal held that there is no legitimate business interest in protecting relationships with former clients.  To bind an employee to a non-compete agreement, the employee must be one who is genuinely in a position to disrupt your business or who had access to proprietary information or training.  A lower level employee who is not privy to such information will generally not be a good candidate for a non-compete agreement. Thus, using such agreements for all employees, no matter their sensitivity, limits the likelihood of enforceability.

3. The best candidates may not sign. In-demand candidates may decline a job opportunity if they will be required to sign a non-compete agreement. In many industries, valuable employees have a skill set, experience or licensing that makes it unlikely they will be willing to restrict their opportunities to work in their chosen industry. Likewise, exiting employees may be unwilling to enter into such an agreement. They may even quit.

4. Courts are often resistant to enforcing non-compete agreements.

5. Costs to enforce non-compete agreements are high. Bringing suit to enforce an agreement generally is expensive and can be time and energy consuming. Litigating issues of business competition can be disruptive of the very customer, vender and other relationships non-compete agreements are designed to preserve. Moreover, in litigation, the enforcing company may be required to divulge proprietary and confidential information to prove the violating employee was provided such information within the course of employment.

Given the challenges and limitations of non-compete agreements, there are other, less severe restrictive covenants and agreements that may be used as alternatives or supplements to non-compete agreements. These include confidentiality agreements, non-solicitation agreements, and non-circumvent agreements. Which combination of these is best for your situation requires a complex balancing of a variety of factors.

 

Mike Freed is a shareholder in Gunster’s Jacksonville, Florida office. He is Florida Bar board-certified in business litigation and regularly litigates the enforceability of non-compete agreements.

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