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Cautionary Tale of the Unenforceable Non-Compete

October 29th, 2018 by Valerie Juarez, Inspiring HR

Once upon a time there was a Big Bad Wolf who was tired of huffing and puffing for the Three Little Pigs, so he quit his job and took a position with Little Red Riding Hood terrorizing the forest.

Well, as you can imagine, the Three Little Pigs were blindsided and furious.  After years of apprenticeship, marketing efforts, and successfully building The Big Bad Wolf’s image as a terrifying wind wrangler to the reading public, they felt betrayed and more importantly, irrelevant.  As a key figure in their story, the Big Bad Wolf’s departure could have a tremendously negative impact on their future book sales and online subscriptions if not replaced quickly.  What literature class would want to read about two failed architects and another with limited institutional design experience without a moral to learn? They would need to replace the Big Bad Wolf quickly to stay competitive, but wanted consideration for their losses.  They then pulled out a non-compete agreement that the Big Bad Wolf signed when he first accepted the position. It was all encompassing and very broad. Surely it covered all possible situations! So, they sued him for breach of contract.  Long story short (no pun intended)… they lost. But why?

While the Three Little Pigs had a legitimate interest in protecting their story business, they failed on a number of common factors that courts look at to determine if an agreement is reasonable:

1.      THE GEOGRAPHIC SCOPE WAS TOO LARGE.

While a non-compete agreement is established to protect an organization, it shouldn’t attempt to stop a person from making a living anywhere.  In some states, a geographic region of say 15- 20 miles might be considered a reasonable distance to ask that a former employee not open shop and directly compete for the same customers. The Big Bad Wolf was aware of this and when he left the Three Little Pigs back on their farm in England, he went instead to Italy, where Little Red Riding Hood had posted the vacancy left by her prior wolf, who had been in service for 600 years and was about to retire.  The Big Bad Wolf relocated by 1,250 miles.  The courts felt the Three Little Pigs could not be that restrictive on his career opportunities.  Now it might have been possible to state that all of Europe was off limits had the agreement only had a lifespan of, say, one month.  It’s also important to note that in the world of restrictive covenants across international borders, limitations in the US may not hold up elsewhere.

2.      THE LENGTH OF TIME THAT THE NON-COMPETE WAS TO BE ENFORCED WAS FOUND UNREASONABLE.

The Three Little Pigs had failed to establish a specific length of time to restrict the Big Bad Wolf. Asking the Big Bad Wolf to never work as a bad guy again in the story telling field wouldn’t hold up in most states that permit non-compete agreements.  How long is okay? The answer: it depends.  Typically, we see terms of up to two years depending on the scope of the other covenants in the agreement and the state in question.

3.      THE THREE LITTLE PIGS WERE TRYING TO STOP THE BIG BAD WOLF FROM DOING DIFFERENT WORK.

It’s not like the Big Bad Wolf took his huffing and puffing training and used that technique to ensnare Grandma or Little Red Riding Hood. Sure, he had an established bad guy image, but with the Three Little Pigs he generated wind and never got to eat. He was starving.  In his new gig, the Big Bad Wolf was filling a generic bad guy vacancy with a very publicly, pre-established technique of devouring storybook characters. He’s using a different skill set and did not carry trade secrets over from one story to another.

Side note: If they had been armed with a strategic recruiting and selection process, the Three Little Pigs could have quickly backfilled with another wolf who likes farm life.

4.      THE THREE LITTLE PIGS DID NOT OFFER ADDITIONAL COMPENSATION OR BENEFITS IN RETURN FOR THE BIG BAD WOLF’S AGREEMENT TO SIGN THE NON-COMPETE.

Lazy and cheap business characters that they were, the first two Little Pigs never bothered to include discussion of any compensation terms to the Big Bad Wolf in his agreement not to compete, and the third Little Pig was too busy laying bricks to notice.  So, they failed on this factor as well.

THE MORAL OF THIS STORY IS…

Not all states permit non-competes, and those that do may have very specific statutes to address restrictive covenants.

If you have employees across state lines, nuances in non-compete agreements such as declaring which state’s laws under which you will primarily operate are important to consider, while also understanding that your agreements might still falter in the courts from state to state.

Other factors might impact enforceability, such as:

  • The employer owes the employee money
  • The employee was wrongfully terminated
  • The agreement was signed under duress

Quite often, employers over-reach and use non-competes to restrict employment in an attempt to shield their customer lists from departing employees, when a simple Non-Solicitation agreement will do.  Non-Solicitation agreements limit an employee’s ability to solicit your active and recent customers and prevents them from actively soliciting your employees for a specific period of time, without impacting a person’s overall ability to work in the industry.

When trying to determine if you need a non-compete, a non-solicitation, confidentiality, or non-recruit agreement, it’s best to seek legal counsel or obtain otherwise properly vetted documents from a reliable source for the situation in question. Every non-compete agreement situation is different and will be viewed case-by-case by the courts if it gets litigious.

If this teaches anything, it is that you should approach employment agreements and contracts with caution and with the support of knowledgeable professionals in HR and labor law to help keep your company’s story in proper order.

The End.

Click the link to view the recent INFINITI HR blog 2018 Update: Unpaid Intern or Employee or check back for more on human resources, payroll, insurance and benefits.

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