Non-competition clauses - can they be relied upon in the US ?
Clients, whether employers or employees, generally expect employment agreements to contain essentially the same elements regardless of the law governing the agreement – a job description, salary information, termination details, and non-competition/non-solicitation clauses.
Clients are familiar with French law on non-competition restrictions. Namely, that the restriction must be limited in duration, activity targeted, and geographical scope and that there must be financial compensation paid for this restriction in the ability to work.
However, most clients (and many attorneys) are unfamiliar with US law on non-competition restrictions. When unfamiliar with the specifics of US law, one often forgets that each of the 50 states has different laws, including different laws on the validity and enforceability of non-competition clauses in employment contracts. Usually, each state’s law on the subject has developed and evolved in case law, i.e. through decisions rendered by courts on particular cases. Thus, disputes involving non-competition clauses in employment contracts rely heavily on the facts of the particular case in order to distinguish or align the facts with the facts at issue in past court decisions.
In signing employment agreements, many clients forget to question whether the language in the non-competition clause will be upheld by a court – assuming that there is nothing to worry about as long as both parties have agreed to the language (or that the language is similar to what would be used in France). However, when signing an employment agreement subject to any US state law or even if sending employees to work in the US, it is important to understand the particular state’s limitations on non-competition clauses.
For example, except for a few very narrow exceptions, California will invalidate ANY attempt to restrict an employee’s ability to exercise his profession. Therefore, employers unfamiliar with California law are often unpleasantly surprised with being unable to enforce non-competition clauses after sending employees to work in California.
Although other states at times consider adopting California’s approach, most find non-competition clauses valid and enforceable provided they meet certain criteria. The most common criteria (similar to those in France) are whether or not the restriction is limited in duration, scope of work, and geography.
However, the courts in each state evaluate these criteria differently. For example, in one state, a two-year restriction might be considered excessive while in another state, two-years would be permissible. Besides different states having different limits, there are differnt consequences when a restriction exceeds the recognized limits. For example, in states in which a two-year non-competition restriction is considered excessive, one state might find the entire clause unenforceable due to the excessive duration, whereas another state might find the clause enforceable except for the duration and the court would reduce the period to one which is reasonable according to that state’s laws.
Unfortunately, there is no simple rule to follow in order to have an enforceable non-competition clause in the United States. Instead, the parties must look at the facts of cases that have been litigated in order to understand the likelihood of their own clause being upheld.
Making matters even more complicated, courts can sometimes reverse directions. For example, a common limitation is geographical scope. Where a court used to find a country-wide or world-wide restriction unenforceable, in an ever increasing global economy, a court might find that in some cases, a world-wide restriction is reasonable given the nature of the employee’s work and the employer’s market. This evolution in thinking about global restrictions can be seen in New York where courts are becoming more willing to accept broad geographical limitations if the broad scope is supported by the particular business being conducted.
Although an employer and employee may never be 100% certain that their non-competition clause will be upheld, they can reach a certain level of comfort in the enforceability of their agreement by consulting with attorneys familiar with a particular state’s case law. Generally, employment and business attorneys are familiar enough with the evolution of case law in their states such that they can determine whether a particular clause is generally enforceable, falls in a grey area that might or might not be enforceable, or is clearly unenforceable.
At d’Alverny Demont & Associés, we assist clients in evaluating non-competition restrictions and are often in contact with colleagues in the US who provide guidance on their particular state’s laws. We recommend all clients consider the enforceability of their agreements before relying on their protection.
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