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Is It Time to Change Your Company's Non-Compete Clauses?

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By Casey C. Sullivan, Esq. on July 02, 2015 3:25 PM

No company likes to lose valuable employees -- given how much it costs to hire, train, and develop employees, pretty much all of them are valuable. What's worse is when a skilled employee leaves to work for the competition. As Chris Brown so eloquently put it, highly skilled professionals ain't loyal.

What's a GC to do? Slip in non-compete clauses and other post-employment restrictions into all employment agreements, of course. However, given recent updates in the law, it might be time to update your standard boilerplate -- or consider revising them all together. Here's what to keep in mind:

Limitations on Post-Employment Restrictions

As always, in-house counsel should be aware that the rules governing post-employment restrictions vary from state to state. Your standard employment agreement in California, where non-compete clauses are largely unenforceable, will have to differ from the one you use in New York, where such restrictions are allowable so long as they are reasonable in scope, duration, and geographic reach.

In many places, post-employment restrictions and non-competes will be evaluated as to their reasonableness. A non-compete will likely not be enforceable against an employee who did not have access to confidential information or trade secrets. The same is true for employees who had no close relationship with customers or clients -- after all, there's no Rolodex for them to steal. The key is to show that your restrictions are:

  1. Narrowly tailored to an employee's specific circumstances
  2. Designed to protect a legitimate business interest
  3. Not overly burdensome and limited in duration

The same general rules apply to non-solicitation covenants, which prevent an ex-employee from trying to steal away a former employer's clients.

The Blue Pencil Rule

Under the Blue Pencil Rule, when a court encounters an unreasonable restriction, it may alter it to make it reasonable, rather than simply striking the contractual term altogether. In employment law, this gives courts wide leeway over the terms of a contested contract. 

However, recent developments are changing the application of the doctrine, according to Inside Counsel. Some courts are refusing to rewrite contracts, simply striking invalid non-compete clauses, instead of limiting their applicability. This trend, which seeks to protect employees in weak bargaining positions, further emphasizes the need to make sure that your post-employment restrictions aren't just boilerplate, but reasonable, tailored protections of your valid business interests.

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