Non-Competition Agreements: Choose Your Law Carefully

Non-Competition Agreements: Choose Your Law Carefully

Many employers rely on non-competition and non-solicitation Agreements with employees (collectively, “noncompetes”) to protect confidential or proprietary information and business relationships when the employee leaves.  Properly used, noncompetes can serve a valuable purpose—but only if they are enforceable.  In litigation over noncompetes, the first and potentially decisive battle concerns this legal issue.

The enforceability of noncompetes is decided by state law, and while nearly all states agree that noncompetes are a disfavored restraint on trade, just how disfavored can vary greatly.  The general rule (and the rule in Washington) is that noncompetes must be “reasonable” in terms of duration, territorial scope, and the scope of activities prohibited.  Yet what is “reasonable” varies from state to state.

Equally important is what state law allows courts to do with noncomeptes they find unreasonable.  In some states, including Washington, courts may reform (essentially rewrite) an overbroad noncompete.  Other states, such as North Carolina, follow the “blue-pencil” rule, whereby a court may strike out or sever offending language from a contract, leaving the remaining language unchanged.  And in others, California being the prime example, noncompetes are deemed contrary to public policy and are unenforceable except in very limited circumstances.

To illustrate the practical ramifications of these rules, say you have a noncompete that prohibits a widget salesman from selling widgets “anywhere in Seattle or the United States for a period of 10 years.”  Such an agreement is potentially overbroad on two grounds: duration and territorial scope.  A court with power of reformation could simply rewrite the offending terms, such as by reducing the term from 10 years to 2 years.  However, under the blue-pencil rule, the court could only strike out offending language.  While this would permit the court to reduce the territorial scope (by striking out “United States”), no such fix is possible for the duration of the noncompete.  As a result, the court under the blue pencil rule would likely find the agreement unenforceable.  Finally, under those courts following California, the agreement is void entirely.

Consequently, employers may think they are protected when in fact they are not—it all depends on which state’s law applies to the interpretation and enforcement of the noncompete.  But while employers may give a lot of attention to the terms of a noncompete, choice of law is often overlooked as just part of the contract’s miscellaneous provisions or “fine print” or left out altogether.  The wise drafter will ensure that any contract with a noncompete includes a choice-of-law (as well as venue) provision, and will attempt to select the state law that is most likely to support enforcement of the noncompete.

–Ryan Solomon