The Need to Update Noncompetes, and the Legal and Practical Issues Associated With Doing So

07 October 2013 Labor & Employment Law Perspectives Blog

If employers want their noncompete agreements to work, and keep working, it’s critically important that they update those agreements on a regular and repeated basis. Over time things change, and those changes can affect key things that impact the enforceability of a non-compete, such as:   – The contours of state law change with each new court decision deciding the enforceability of a noncompete agreement. – Employees’ job duties typically change over time in ways that can render the terms of a noncompete drafted years ago unhelpful, if not entirely unenforceable. – The employer’s business changes – added or deleted affiliates or business lines can alter the scope of the noncompete restriction in a way that either makes it too unreasonably broad to be enforced or too narrow to be useful. – The competitive landscape navigated by the employer keeps changing such that what were reasonable restrictions at the time the noncompete was executed could become unreasonable over time. As all these types of changes happen faster and faster in today’s world, and as litigation over noncompetes continues to rise, employers have to update their noncompetes even more frequently to keep them relevant. But having current employees sign new noncompetes poses both legal and practical challenges.

The Legal
Because a noncompete agreement is a contract, to be enforceable there has to be some “consideration,” or value, given to the individual in exchange for the promise not to compete. Beware: in many states it will not be sufficient to simply require the signing of the new noncompete as a condition of ongoing employment. In fact, in some states like Illinois and Wisconsin, continued “at will” employment may not be enough consideration for a noncompete agreement with a current employee. A recent Illinois appellate court concluded that continued employment for less than two years is not sufficient consideration to support a valid noncompete.

It is thus wise to give something more than the opportunity to come back to the same job tomorrow. To provide sufficient value to the current employee, employers typically make the signing of the updated noncompete a condition of eligibility for some additional benefit. For example, the employer might offer a one-time bonus payable only in the event that the Company achieves a certain level of profitability. Or, the updated noncompete can promise a period of notice (or pay in lieu of notice) in the event of a certain type of termination.

A belt and suspenders approach is useful. In addition to some identifiable new value, the employer can confirm in the new noncompete that obligations under the prior agreement are superseded and extinguished. And, the employer can make the signing of the new noncompete a condition of continuing employment (if it is willing to part ways with any employees who refuse to sign). Legal counsel should be used to revise the existing noncompetes to conform with the existing law and account for changes in the employees’ job duties, the company’s business, and the competitive landscape.

The Practical
The legal stuff can be the easy part. Because employees are people, the practical challenges can be the most vexing. To get updated noncompetes signed with minimal disruption, the employer needs to plan the messaging. Many employees react negatively to noncompetes, feeling like it is an intrusion on their marketplace freedoms, and feeling like the process reflects the employer’s distrust of them personally. But the process is about protecting the company’s business, which is in the mutual interest of everyone (except those that may be planning to damage the business to advance their own interest who should be identified sooner rather than later). It can also be useful to emphasize to employees that the law changes over time, and as with other agreements and policies a company needs to ensure its legal documents are up to date and valid. Of course the employer should emphasize the extra value being given for the signing of the new noncompetes, and it is particularly helpful if some aspect of the prior noncompete is being narrowed in scope (time, geography or other) so that the message can emphasize this narrowing of the restriction. The proper planning and messaging can accomplish the mission.

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