[Modified from original post on or about February 5, 2007] 

In this post, we’ll look at employment contracts in general, non-competitive agreements, and what happens if a former employer with whom you signed a non-competitive agreement claims you are violating one. 

Non-competitive clauses have three main pillars: Term, Scope and Territory. 

Term refers to the time or duration. 

Territory is self-explanatory.  

Scope is the definition of the business.

For the sake of definition, a contract of adhesion is a ”type of contract, a legally binding agreement between two parties to do a certain thing, in which one side has all the bargaining power and uses it to write the contract primarily to his or her advantage,” according to the Thomson Gale Legal Dictionary found on Answers.com.

Admittedly, a Non Competition agreement tends to be a Contract of Adhesion, and are not valid according to many Judges. 

The rationale is that if you are a random job-seeker who is looking for employment and a prospective employer hires you, you do not have much leverage in negotiating a fair and reasonable employment contract.  Believe it or not, in this case, you are almost better off not trying to negotiate one and simply sign what is offered to you.  This way, the contract you sign is a contract of adhesion.

Of course, the words on the paper should in theory be secondary to the spirit of the agreement.  Understand what it is that said employer is concerned with and try to make sure that you do not violate that.  After all, loyalty is a nice thing to demonstrate to any employer, past, present or future.  Furthermore, if you show to your new employer a tendency to violate a non-competition agreement you signed with a previous one, it does give a cause for concern to your new boss.  Or, at least, it should.

Non competition agreements outline three parameters: 1. Scope of Business, 2. Territory and 3. Term.

1. Scope of Business

Realistically, no employer can forbid you to gain an income.  But sometimes a court will uphold a concise, clear, fair and valid non competition agreement.  The key is that it cannot be so vague that there is room for interpretation and debate.  If a court finds one to be unclear, they will not strive to clarify it, they will simply strike it down.

But, if you are a key employee who has a reasonable, valid and enforcable non-competition clause, then non-solicitation clauses might indeed be upheld if the courts feel that you can earn an income in a way that does not violate your contract.

2. Territory

In offline settings, territory is usually limited to a city, state or country, even a continent.  No one can forbid to work in a competitive business around the world.  If you are an employer seeking a global Territory, good luck.  Of course, if you operate online, it is reasonable, in all fairness, to ask for a worldwide clause for territory, but then to avoid the courts striking it down, you need to have a very specific Scope of Business or short Duration.  If an employer is greedy, the court will decide that they are being unreasonable and strike down the non-compete.  This is risky for employers and as such, an employer better not be greedy with regards to one.

3. Term/Duration

The length of time that an employer forbids you to work in a given industry, or for a given competitor needs to be reasonable.  You cannot, for example, expect a judge to agree that ”forever” is reasonable.  This depends on the industry, sometimes 2 years is valid, sometimes 1 year is not.  It is not a black and white matter.  In one case affecting Earthlink, a judge decided that even six months was too long due to the rapid changes in the online industry!

A very important consideration is whether or not an employee left voluntarilty (and not as a result of constructive dismissal) or was dismissed outright.  In cases of voluntary resignation, non-competition can be valid.  In the case of constructive dismissal and outright firings, non-competition agreements tend to be invalid, because the main pillar is that one should be able to earn a living.

Furthermore, a very important consideration, proven time and time again is that competition is welcome (if one exists, that is) and only illegal or unfair competition can be prevented through a fair and valid non-competition agreeements.  There are easily dozens of cases that support these statements.

Because a lot can happen and cases take a while to reach the courts, sometimes an employer who feels they were wronged can choose to file an injunction.  An injunction - depending on what kind of injunction it is - effectively prevents you from doing something.  In the context of an employee joining a competitor, an injunction will prevent an employee from joing that competitor until the case heads to the court.  In the context of an employee launching a new company, an injunction will prevent an employee from starting / operating the company until the case heads to the court. 

For more on injunctions, read on.

Injunctions: Provisional, Interlocutory, Permanent

A Provisional Injunction, if granted, shuts you down for 10 days.

An Interlocutory Injunction shuts you down until the Trial.

A Permanent Injunction, well, that’s the kybosh on your business. 

Those who seek injunctions do so hoping that it proves so expensive and costly that a Provisional turns into a de facto Permanent one.

In the case of Injunctions, the system is clear: you are guilty until proven innocent.  Well, not quite.  Here is how it works.  With injunctions, the party moving (making the motion) swears on the face of the record, through affidavits, that there is some harm being caused by the defendant.  They submit affidavits, along with documents supporting their claims.  Since they swear that these are all true and accurate (though sometimes, we presume, they are not), a defendant can only argue his or her case using the documents that are submitted on the face of the record.

This seems draconian, and at face value it is, but the truth is that the party seeking the injunction needs to pass some tests.  And to pass these tests you need a good lawyer, and well, facts!

In other words, when the matter is frivolous and lacks merit, the Judge will see through it and laugh the plaintiffs out of court.  We’ve never seen this happen, of course, but we’re sure it must happen at some point.

The Judicial system, as complicated and costly as it might be, makes sense in some ways. 

The burden of proof remains with the plaintiff.

To obtain a Provisional Injunction, the plaintiff/petitioner must pass four tests:

- Urgency: there must be an urgent need to shut me down.  In laymen’s terms, you get to your gas station one morning and someone is bulldozing the neighbor’s lawn to erect a competing gas station, but that might not be enough, since that is competition only, what would be cause for an injunction is if it’s an old employee of yours with whom you signed a non-competition; or if they are not an employee, it is someone who is using your trademark.

- Clear Right: Here the plaintiff needs to prove that there is a material similarity in business, or that they have a clear right to get an injunction.  This sometimes is used interchangeably with Clear and Apparent Right.  If it is Clear Right, it it harder for the plaintiffs and easier for the accused, if it is Apparent Right, it is the opposite.

- Balance of Inconvenience: The key here is not who is bigger or smaller, but rather, who suffers more from the Judge’s decision.

- Irreparable Harm: In the fourth and final test, the plaintiffs must prove that by staying open for business, I cause irreparable harm to them.  Loss of clients, traffic or revenue was their argument. 

It should be stated, unequivocally, that harm is far and away the most important factor here.  If no harm is done, or if for some odd reason the plaintiff says that no harm is done, no way will the injunction be granted.  Furthermore, even if some harm is done, then harm needs to be so irreparable and immeasurable that it cannot be quantified in the eventual trial, and as such the judge will grant temporary relief as to prevent losses of an immeasurable scale.  When a client walks into a lawyer’s office, it is probable that this point is not well articulated by the lawyers.  Of course, it is up to the client to really explain the case to the lawyer, since lawyers cannot be expected to be experts at all industries.  Oftentimes, injunctions are of a personal, frivolous and meritless nature seeking to intimidate and outspend the opposition into capitulating.

Back to injunctions: The only difference between a provisional and interlocutory injunction is that the former entails an urgent matter whereas the latter does not.  In other words, to obtain an interlocutory injunction, you only need to pass three tests (the same four, less urgency). 

The last injunction - permanent - is granted at the merit stage… which can be years after the initial motion is made, that is why those who want to outspent the defendant knowing they do not have a case or having a very strong case will choose to file a provisional one, hoping that they can make it a de facto permanent one.

Bear one thing in mind, injunctions are expensive.  We’ve heard of companies spending $100,000 and more to file one.  While you can defend yourself for less, most lawyers will tell you that it can cost $40,000 to $100,000 to fight one.  Of course, you can represent yourself, but only a fool would represent himself.  Right?

Last but not least, one major consideration.

Right to Self-Representation; Right of Business Owner to Represent His Company

It should be noted that in most jurisdictions, an individual who is not a lawyer can represent himself (or herself).  But in some markets, an individual who is not a lawyer cannot represent himself.  If you leave one company and join a competitor, you should ensure that you ask your new employer to foot the bill in the event your former employer sues you… and if you start your own company and have to hire lawyers to represent your company (and thus incur big fees) and prefer not to; here’s one loophole, jurisprudence exists showing that a company can only sue someone who is a party to a contract, technically, you are - as an individual - party to a contract, and not your new company.  But some lawyers will sue your company anyway hoping that you do not realize that loophole to get you to spend your way into losing.

The bottom line is: be honest, do the right thing and do not sign contracts with bad people.  That is the only way to sleep well at night.

Constructive Dismissal?

Oh, one last thing, if you had a non-competition agreement but lost your job over constructive dismissal, which is many things but includes:

- loss of reponsibilities
- loss of salary
- loss of power and prestige
- being overlooked for a promotion you asked for and deserved it…

Then there is a good chance that the non-competition is going to be struck down because you were, in fact, forced to resign.  We’re not sure how easy it is to prove constructive dismissal, but this is why it is always easier to prove such a thing if you keep records (emails, etc.) proving that you were indeed a victim of constructive dismissal.

It should be noted that I am not a lawyer, but having written on career advice for six years, this is a topic that I have been asked about.  You should consult with a lawyer, but if you find yourself in a tough spot, feel free to email me at ash@mojosupreme.com.  Good luck, and remember, things are never as bad as they might appear.

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