Primer for better understanding restrictive employment agreements Part 2 - by Donna Toman Salvidio

Part 1 appeared in the December 15, 2017 CDE section

The Ties That Bind (part 2 of 2)

A non-disclosure agreement prohibits an employee from disclosing trade secrets, insider operations knowledge and proprietary information to third parties, such as a competing new employer. Non-disclosure agreements can be used by management companies to prevent their former employees from disclosing customer lists or technological operations to their competitors. There are practical difficulties in applying non-disclosure agreements to the property management profession, however. The problem-solving and people skills possessed by the top managers are typically accumulated talents rather than trade secrets. Accordingly, management companies may have difficulty identifying the proprietary information they are trying to protect.

What is the impact of non-compete and are they enforceable?

In the sphere of community association management, an appropriate non-compete agreement is not one-size-fits all. A regional management company might provide that upon the termination of employment, a property manager is prohibited from providing property management services to another condominium or management company within a 20-mile radius for the next two years.

This type of restriction is probably valid in states that recognize non-competes because it would not prevent the former employee from working as a property manager, but it would prevent the manager from working for a competitor in the same general market as his or her former employer. However, if the same restriction were applied to the employee of a national management company and that employee were prohibited from working for competitors located within a 20-mile radius of any of its existing management offices, that manager might have few options for continuing in the profession, or might be forced to relocate a great distance. A court might find the same restriction valid in the former case and too restrictive in the latter example. Courts determine the validity of each non-compete on a case-by-case basis. Most courts will not enforce a non-compete unless it meets the following criteria:

• The terms are tailored to protect only the employer’s legitimate business interests.

• The agreement is supported by valid consideration.

• It was not signed under duress.

• It is reasonable as to scope, duration and geographical area.

• It is aligned with the public interest.

State laws vary on the enforceability of non-compete, non-solicitation and non-disclosure agreements. Most states, including Massachusetts, Connecticut, Rhode Island, Vermont, Maine and New Hampshire, recognize the validity of appropriately tailored agreements. Massachusetts courts are more inclined than some other states to void, selectively enforce or rewrite overly restrictive agreements. 

While many non-compete, non-solicitation and non-disclosure agreements may not be legally enforceable, the cost of challenging an employer’s enforcement action can be prohibitive. Some employers use the threat of a lawsuit to gain compliance by the former employee.

Non-competes are also used by employers to prevent competitors from hiring away employees in violation of a non-compete. This is particularly true where the new employer is made aware of the non-compete by the prior employer and continues to solicit the employee anyway. Employers often have better success pursuing the companies who are trying to hire their former employees than suing an individual employee for breach of his or her non-compete. 

The evolving body of law is trending away from the wholesale enforcement of non-competes. Management companies would be wise to consider utilizing narrower non-solicitation and non-disclosure agreements to protect their client bases rather than encumbering managers with overly broad and potentially unenforceable non-compete agreements. 

Breaking it Down:
Generally, courts consider the following factors when evaluating the enforceability of non-compete agreements:

• Is the duration of the restriction reasonable in time?

• Is the geographical scope of the restriction reasonable in location?

• Can the employer identify specific confidential information that warrants protection?

• Would enforcement of the agreement create an undue hardship for the employee?

• What were the circumstances surrounding the execution of the agreement?

• Was there a material change in the employment relationship that warranted the execution of a new agreement (and, if so, was there fresh consideration provided by the employer in exchange for the new agreement)?

• Is some form of severance provided during the period covered by the agreement?

• Is the agreement enforceable even if the employer terminates employment?

• Is the public interest detrimentally affected by the enforcement of the agreement?

Donna Toman Salvidio, Esp. is an attorney at Fletcher Tilton PC, Worcester, Mass.