Two Mistakes Companies Make With Non-Compete Agreements

A lot of companies require their employees to sign non-compete agreements (where the employee agrees not to work for a competitor for a certain amount of time after leaving the company), non-solicitation agreements (where the employee agrees not to seek business from the company’s customers after leaving), or confidentiality agreements (where the employee agrees not to divulge the company’s proprietary information to anyone).

But two recent cases show that companies can make mistakes with these agreements that render them legally invalid.

In one case, an Illinois insurance company made a broker sign a non-compete agreement barring him from working for a competitor anywhere in the country for 28 months after leaving his job. The agreement also barred the broker – who sold malpractice insurance to lawyers – from selling any kind of professional liability insurance after he left.

The broker eventually resigned and started working for another company, and his ex-employer sued to enforce the agreement.

But the Illinois Appeals Court refused to enforce it, saying that the provisions in the agreement were so broad as to be unreasonable.

Specifically, the court said the agreement didn’t need to cover all 50 states in order for the company to protect itself from threats to its business interests. The court also found that there was no good reason to keep the employee from selling all kinds of professional liability insurance, when he had only sold one kind for the company. Finally, it said 28 months was way too long to restrict the employee’s ability to work, since he had only spent 20 months working for the company before he left.

The company then asked the court to modify the agreement, by limiting its terms to something more reasonable. But the court refused, and threw out the agreement altogether.

In essence, the court said the company lost its right to place restrictions on the employee by overreaching – and modifying the agreement would only encourage other companies to overreach, because they would know that there was no real punishment if they went too far.

In the second case, a Massachusetts salesman joined a company in 2005 and signed an employment agreement laying out his responsibilities and salary structure. At the same time, he signed separate non-compete and confidentiality agreements.

In 2012, the employee was promoted to district sales manager and signed a revised employment agreement laying out his new salary and responsibilities. The new agreement said that it contained “the terms of your employment,” and didn’t make any reference to the non-compete or confidentiality agreements.

Later, a dispute arose and the company accused the salesman of violating the confidentiality agreement.
But a federal judge sided with the salesman, and said that the non-compete and confidentiality agreements were no longer any good.

Since the 2012 employment agreement said it contained “the terms of your employment,” and didn’t refer to the non-compete or confidentiality agreements, it overrode those agreements and the employee was no longer bound by them, the judge ruled.

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