For every story of an employer successfully enforcing a non-compete agreement against a former employee, there is one of an employer losing – and wasting tens of thousands of dollars in the process of trying to win non-compete fights. A non-compete case typically goes south for an employer for one of two reasons: (i) the non-compete agreement was poorly drafted; or (ii) the employer did not take the proper steps to enforce the non-compete. This article, Part I of a three-part series, focuses on the first reason. Part II will focus on what steps a company should immediately take after learning of a non-compete violation. Part III will provide guidance to the former employee and his or her new employer on non-compete defenses and strategies.
I. Unlike some agreements, boilerplate matters for non-compete agreements
Most people do not pay attention to boilerplate language before entering into an agreement. And that is often fine, even efficient. For example, user agreements for mobile apps, bank account agreements, memberships to national gyms, etc. No one reads them. No point. They are non-negotiable and rarely become an issue in any event. But in the world of non-compete agreements, boilerplate language matters. Employers should ensure all beneficial provisions are included, while employees should read such provisions carefully as they can sometimes negotiate these terms. More importantly, boilerplate provisions will almost certainly become an issue if a non-compete dispute arises.
Case in point: in a 2013, a national bedding company brought a lawsuit against one of its former sales managers to enforce his non-compete agreement. The former sales manager had worked for the bedding company for several years, starting as an entry-level sales representative. After working his way up to a regional sales management position, he launched his own competing bedding company across the street and poached several employees in the process. The national bedding company sought an immediate injunction to shut down the former employee’s new competing business. At first glance, the case seemed like a sure winner for the employer. But the employer lost. The court refused to grant an injunction. Worse, it ruled the entire non-compete agreement was likely unenforceable.
What went wrong? The former sales manager successfully argued that he signed the agreement in his capacity of an entry-level sales representative, and that it was no longer applicable when he was promoted. In the absence of a provision clarifying that the non-compete was enforceable regardless of any position or title changes, the court refused to impose an injunction. In short, poor draftsmanship.
A more recent case, Collier HMA Physician Management, LLC v. Menichello, M.D, illustrates the importance of a “successors and assigns” provision. As background, HMA Physician Management, a physician management company, hired a physician in 2012. It subsequently went through a corporate merger. In 2014, the physician left the company and joined a competitor, in violation of his non-compete. The physician management company sought an injunction. The trial court denied its request, however, because it determined the original company ceased existing after the merger and that the new company was a “successor.” The non-compete agreement, moreover, did not include a provision stating that it could be enforced by a successor company. As a result, the non-compete was held unenforceable by the trial court.
On appeal, the Florida appellate court properly concluded that the trial court erred when it determined that the company was a successor company. Rather, it was the same company, not a successor, because the form of the corporate merger was a stock sale rather than an asset sale. While the appellate court eventually got it right on the successor analysis, the more practical lesson is this: the company could have avoided the entire legal battle – and saved substantial amounts of money, time, and headaches – if it had simply included language in the non-compete agreement stating that the agreement may be enforced by any successor.
The point: when trying to enforce a non-compete agreement, having the best facts, attorneys and strategy amounts to very little if it is poorly drafted. That means ensuring that key boilerplate provisions, including those outlined below, are part of your non-compete agreement.
II. List of Oft-Neglected Boilerplate Provisions
When drafting non-compete agreements, employers generally focus their attention on the core restrictive provisions – namely, the non-solicit, non-compete, and non-disclosure provisions (referred to collectively as “non-compete” provisions). Yet there are literally over a dozen boilerplate provisions that should also be included as part of a non-compete agreement. If a company’s non-compete agreement is currently only 1-2 pages long, it is surely missing key boilerplate provisions. There should not be any concern that the agreement is too long. No court is going to invalidate a non-compete for being too comprehensive.
Boilerplate provisions that are often included in non-compete agreements are (i) the choice of law; (ii) court venue; (iii) a statement that both sides had an opportunity for legal counsel to review the non-compete; (iv) that the agreement is reasonable and supported by legitimate business interests; (v) that the provisions are severable; (vi) that no modifications may be made unless in writing; and (vii) a jury trial waiver. The following boilerplate provisions, however, are ones that are often missing from non-compete agreements and ones that an employer should include in every non-compete agreement:
- Change of title/position. This provision clarifies that a non-compete agreement is enforceable regardless of whether the employee changes positions or titles during employment.
- Tolling. A tolling provision enables an employer to obtain the full benefit of its bargain with respect to the duration of its non-compete. For example, if a non-compete has a two-year duration and a court finds the former employee violated it for three months, the tolling provision permits the court to tack on three months to the remaining time of the non-compete.
- Alleged prior breaches immaterial. This type of provision effectively provides that the non-compete is enforceable even if: (i) the employee alleges the employer first breached the agreement, or (ii) the employee alleges they have a legal cause of action against the employer. For example, employees often argue a non-compete is not enforceable because the employer first “breached” by not paying all wages owed.
- Successors and assigns. Under Florida law, a successor or assignee to a non-compete agreement can only enforce the agreement if it contains a provision that notified the employee of such a right.
- No other restrictive covenants or interference. Prudent employers ask whether a prospective employee is subject to any other non-compete agreements, especially for employees who work in sales. If a prospect is subject to another non-compete that includes a non-disclosure provision, they should be reminded not to disclose any confidential information or trade secrets from their prior employer. To mitigate an employer’s liability on these issues, a provision should be added to the non-compete that effectively provides that (i) the employee represents they are not subject to any other non-compete agreement, and, if they are (ii) they will not disclose any confidential information. An individual is not allowed to misappropriate a former employer’s trade secrets in any event.
Check your company’s non-compete agreements to confirm all the above provisions are included. Odds are, one or more are absent. Again, the above examples are just a few of the many important boilerplate provisions that should be included in every non-compete agreement.