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Non-competition agreements are critical in protecting information unique to businesses that help them compete in the marketplace. But this business need may clash with people’s need and ability to make a living. Most courts, including in Arkansas, generally look upon non-competition agreements with disfavor when the agreements are ancillary to an employment relationship. In a time where a pandemic has caused thousands of layoffs and furloughs and stretched businesses’ systems and servers from the office building to employees’ homes with increased remote work, any obstacle put in place to making a living is placed under an even bigger microscope. An effective non-competition agreement can be vital in an industry like banking, which experiences extreme competition in the markets the industry serves. Now is a good time to check the legal trends, re-evaluate and revamp any agreements, and develop a plan on handling potential violations.
Legal Trends
Under Arkansas law, non-competition agreements entered into on or after July 22, 2015, are valid and enforceable if “the employer has a protectable business interest” and the agreement “is limited with respect to time and scope in a manner that is not greater than necessary to defend the protectable business interest of the employer.” Ark. Code Ann. § 4-75-101(a). Unlike in the past, courts are now able to reform any unreasonable restrictions and enforce the reformed agreement.
At the federal level, President Biden recently issued an “Executive Order on Promoting Competition in the American Economy.” Among other things, it encourages the Federal Trade Commission to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” While the Executive Order did not make any immediate changes to the law on non-competition agreements, it has raised a lot of questions, especially for multi-state employers.
Across the country, several states (and Washington D.C.) have recently instituted or plan to institute some sort of ban on non-competition agreements. Illinois, Maine, Maryland, Massachusetts, New Hampshire, Virginia, and Washington currently prohibit non-competition restraints on low-wage workers. The definition of low-wage work between these states ranges anywhere from 200% of the federal minimum wage ($14.50/hour) up to $100,000 a year. Rhode Island prohibits non-competition restraints on non-exempt employees under the FLSA, while D.C. plans to institute an effectively total ban on non-competition agreements. And, many courts have been reluctant to find non-compete agreements reasonable and enforceable during the COVID-19 pandemic.
Reevaluating/Revamping Your Agreements
Although states like Arkansas allow courts to reform agreements that may overreach, a reasonable non-competition agreement helps avoid litigation and the costs that come with it. The three areas of focus in drafting a non-competition agreement are (1) the legitimate business interests to be protected, (2) the time required to protect those interests, and (3) the geographic area where those interests should be protected.
Legitimate Business Interest
The business interest being protected has to be legitimate or there is no valid agreement. Ultimately, courts examine whether the protected information can be used to gain an unfair competitive advantage. The information being protected has to be truly treated as proprietary or confidential. That may be accomplished through a confidentiality agreement or workplace policies on confidentiality, proper data storage practices, immediate termination of administrative access and collection of work-issued devices upon separation of employment, as well as having necessary information security systems in place (e.g., secure logins with multifactor authentication and password-protected servers). Access to the protected information should be limited on a need-to-know basis. The employees who fall under the need-to-know basis are those who most likely need to enter into an agreement.
Time Restriction
Two years is normally considered to be reasonable, but business context matters. In other words, what is the lifespan of the information (e.g., pricing, customer/client relationships, trade secrets, etc.) being protected? For instance, the time needed to protect customer/client relationships should include the considerations of how long it takes (a) to replace the former employee, (b) train a new employee, and (c) for the new employee to develop relationships with the customers/clients. And if a company’s pricing information or trade secrets change or update regularly, a longer time restriction will likely be unreasonable. Given the typical length of litigation, a tolling provision pausing the time restriction upon a violation may be worth considering to avoid the expiration of the time restriction before action can be taken in response to a violation.
Geographic Restriction
The target area is where the former employee’s work spanned. Courts typically will not enforce restrictions prohibiting former employees from working in areas or states they have never worked. In some circumstances, when an agreement is otherwise reasonably limited with respect to time and scope, a geographic restriction is not needed. For example, restricting a former employee from soliciting customers/clients which he or she has worked with during the past two years, for a one-year period upon separation of employment, would likely be reasonable.
Developing a Plan
The correct response to a potential violation is essential. This typically means immediately sending a demand letter detailing the portions of the agreement being violated and including a deadline in which to cease and desist any prohibited actions. If the demand letter is unsuccessful, litigation is likely the next step. Litigation provides critical injunctive relief in the form of a court order prohibiting the former employee from violating the agreement in place. Damaged customer/client relationships and goodwill lost from a business’s name are not easily repaired with money damages and may cause irreparable harm. Prompt action is crucial when it comes to litigation because not asking for injunctive relief before the expiration of the time restriction in the agreement could eliminate a meaningful remedy.
Conclusion
Enlighten, reevaluate/revamp, and plan. Doing so helps businesses prepare for the worst.