When using non-compete clauses in employment contracts, company managers should be mindful that such provisions are better able to withstand legal challenges if they are narrowly tailored.
When an employee challenges a non-compete covenant, courts often look at whether the agreement is reasonably limited in terms of time and geographic scope. If it is too broad, a court may find it inhibits the former employee’s ability to earn a living.
State Laws Vary
Laws regarding non-compete covenants vary from state to state. For example, courts in California reject non-compete agreements because state law makes them unenforceable except in limited circumstances. Because non-compete covenants are generally not allowed in California, employers there often use confidentiality agreements and other types of contracts to protect trade secrets and other information.
“Rogers knowingly and voluntarily agreed to be restricted by the covenant, and any perceived harm to him by the enforcement of the agreement is outweighed by the harm foreseeable to Emerson”
– 8th U.S. Circuit Ct. of Appeals,
An example of a precisely targeted non-compete agreement is found in a case involving a one-year clause tucked into a salesperson’s contract. The precise nature of the provisions helped the company succeed in a legal challenge.
Facts of the case: Guy Rogers worked as a sales representative for a number of electrical equipment manufacturers including Emerson Electric. The 69-year-old Rogers formed his own company so he could serve as a manufacturer’s representative for different companies without being a full-time employee at any of them. He served as an independent sales contractor in Georgia, Alabama, Tennessee and Florida.
When Rogers agreed to serve as one of Emerson’s sales reps, he signed a non-compete agreement that barred him from selling competing products for one year after he ended his relationship with the company. He also was barred from serving as a sales manager for any Emerson competitor and agreed not to reveal any of the company’s trade secrets.
Rogers, who sold $1 million worth of Emerson ceiling fans annually, decided to drop the company when one of its competitors, Minka Lighting Co., threatened to sever all relations with him if he didn’t start selling its fans, according to court documents.
Minka was Rogers’ largest account, generating $3 million in sales of electrical equipment annually. That translated into more than $200,000 in commissions for the salesman annually, while Emerson’s commissions averaged about $50,000 a year.
“Rogers took measures contrary to Emerson’s interests almost immediately after he terminated his relationship with it,” according to court documents. Emerson filed suit alleging that Rogers breached his agreement by selling Minka ceiling fans and misappropriated trade secrets by providing confidential information to a competitor. The company sought both monetary and injunctive relief.
A federal judge ordered Rogers to honor his non-compete agreement by not selling Minka fans in Georgia, Alabama, Tennessee and Florida for one year. Rogers appealed, arguing that the anti-competitive provisions of his agreement were too broad.
The 8th U.S. Circuit Court of Appeals upheld the decision to force Rogers to honor his agreement. The court found that while the non-compete provisions barred Rogers from working in a sales or management capacity for an Emerson competitor, this term wasn’t broad enough to deny Rogers any chance of employment within the electrical equipment market. He could still sell electrical equipment that didn’t conflict with Emerson products.
Also, the non-compete provision was narrowly drawn to the four states and, in some cases, not even the entire state. For example, the provision only applied to the panhandle section of Florida. The rest of the state was fair game for the Rogers, the court noted. Also, the one-year term of the non-compete agreement was sufficiently limited to protect the provision from being overly broad or onerous, the judges added.
Status as an independent contractor working for several companies didn’t give Rogers the freedom to ignore his contractual obligations. The court stated: “Emerson has a legitimate business interest in restraining Rogers from violating the terms of their agreement by unfairly using the relationships he developed or strengthened while working with it.” (Emerson Electric Co. v. Guy Rogers, 8th U.S. Circuit Ct. of Appeals, No. 05-1441, 8/8/05)
The Emerson case illustrates that narrowly drawn non-compete provisions stand an excellent chance of being upheld. Such agreements can provide vital protection for a company’s business and trade secrets. Consult with your attorney about drafting agreements.