Non-Compete Agreements Back in the News

Non-compete agreements have been in the news lately. The New York Times wrote an article about sandwich makers at Jimmy John’s sandwich shop being made to sign a non-compete agreement in order to work at Jimmy John’s. The agreement requires an individual who signed the agreement to not work at any shop that receives more than 10% of its income from sandwiches.

More and more employers are requiring their employees to sign on-compete agreements. As Jimmy John’s shows, non-compete agreements are trickling down from high level management where they are common parts of employment contracts to low level workers.

Traditionally non-compete agreements were entered into as part of a negotiation between high-skill, upper-level employees and prospective employers. The agreements helped to safeguard a company’s proprietary knowledge, procedures, or connections.

The new non-competes are part of a take-it-or-leave it agreement and there is no negotiation. Jimmy John’s employees who signed the agreement did not receive anything in exchange for signing a non-compete other than a job.

As the article notes, it is not clear if Jimmy John’s has ever tried to enforce the agreement in court. It is also not clear if the agreement is even enforceable.

Non-compete agreements are typically governed by state law. This means that in each state the enforceability of a non-compete is different. In some states, like California, non-competes are hard to enforce. In recent years some states, Georgia for example, has made it so non-compete agreements are more likely to be enforceable.

The traditional way to analyze whether a non-compete is enforceable is to look at the geographic scope of the agreement, how long it is to be enforced, how connected the non-compete is to the work that was done, and to whom it is meant to be enforced against.

Geographic scope concerns how far the non-compete agreement is supposed to extend. The wider the geographic scope the less likely the agreement is enforceable. If the agreement was supposed to prevent the Jimmy John’s employee, for example, from working in any sandwich shop in the world, then the agreement would probably be unenforceable. If the agreement prevented the employee from working at another sandwich shop within one mile of the shop where they worked then that might be considered more reasonable.

Length of time concerns for how long the agreement is to be enforceable. Some states have period of time under which the agreement is presumptively enforceable. In Georgia the law says non-compete agreements that are to last 2 years or less are presumptively enforceable. In other states courts will look at the totality of the agreement to see if the length of time for the non-compete is reasonable.

Another factor to examine when looking at whether a non-compete agreement is enforceable is to look at how connected the employee is to the information that needs protection. For example, a non-compete may be unenforceable against janitor at a software company while the same agreement may be enforceable against a software engineer. The janitor would not know any of the company’s customers, procedures, secrets etc. so there is no reason to prevent the janitor from working at another software company. The engineer may have had access to important information so a court would be more likely to enforce an otherwise reasonable non-compete agreement against the engineer.

Finally, to whom the agreement will be enforced against looks at the business ex-employee has moved to and whether there is a connection between the previous company and the employee’s new company. To even stand a chance of being considered enforceable a non-compete must be limited to businesses that may have a connection with the business trying to enforce the non-compete. Looking at the Jimmy John’s example, the agreement prevents employees from working at food stores that make at least 10% of their money from sandwiches. If the agreement said “all stores” or even “all food stores” it would probably be too broad to be enforceable. A non-compete has to limit the agreement to other businesses who are in the same industry and doing a very similar thing as the company looking to enforce the non-compete. It might even be that “stores that make at least 10% of their money from sandwiches” is too broad because Jimmy John’s almost exclusively makes sandwiches.

Non-competes are becoming more common and are being given to employees further down the org chart. Employers are also becoming more willing to got to court to enforce a non-compete. It is clear that employers are using non-competes as a way to control their workers and keep down wages. As an at-will employee your only leverage is saying you will leave. Non-compete agreements make it much harder for employees to follow through on that threat. Leaving a company for a new position somewhere else is also one of the only ways to get a raise nowadays. By making it hard to leave it means that employers can keep their employees, not give them raises, and not be worried about them leaving.

Research also suggest that non-competes reduces innovation and entrepreneurship. Studies comparing California, where non-competes are enforceable, with Massachusetts where non-competes are enforceable, show that non-competes stifle innovation and non-enforcement helped create Silicon Valley. Because of this there have been a number of attempts to change MA’s non-compete environment.

Non-compete agreements are a boon to individual businesses while hurting employees and the economy as a whole. There needs to be a move to make non-competes less enforceable. Unfortunately big business interests in states like Georgia are more interested in their own well-being and profits rather than the economy as a whole.

If you are in Georgia and have been offered a non-compete, or a company is trying to enforce a non-compete you previously signed, contact attorney Ben Kandy.

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