The Contract That Bites
by Eman

Part 2

We explored the ridiculous nature of a paranoid clause in a real contract I was sent dealing with talking bad about the employer after leaving their employ. What is further distressing about this employer is the use of a more common section called NON-COMPETITION – DISCLOSURE. While “non-competes” are a normal part of many contracts the question is, are they enforceable? There are places in the world where restrictive covenants are accepted as part of doing business. But generally the contracts are negotiable. Remember to ask to strikeout or amend terms you are not agreeable with. But let’s look at this example as a jumping off point.

During or after termination of his services with Company, directly or indirectly, in any manner utilized or disclose to any person, firm, corporation, association or other entity, except where required by law, any Proprietary Information which is not generally known to the public, or has not otherwise been disclosed or recognized as standard in the industries in which the Company is engaged. During the period of time that the Employee is employed by the Company and for a period of one (1) year after the termination or cessation of such employment for any reason (both periods of time, taken together, being referred to hereinafter as the (“RESTRICTED PERIOD”), the Employee shall not, anywhere in the United States, directly or indirectly, whether individually or as an officer, director, employee, consultant, partner, individual proprietor, joint venture, investor, lender, consultant or in any other capacity whatsoever, develop, design, produce, market, sell or render (or assist any other person in developing, designing, producing, marketing, selling or rendering) products or services competitive with Company proprietary offerings at an time during the Restrictive Period.

The Employee clearly understands that the Company’s area of business and territory is the entire United States of America. This is due to the majority of the Company’s customers being based outside of the State of XXXXXXX (confusion apparently), but within the United States of America.

Whoa that was a mouthful. Let’s break this down some. The clause basically restricts the employee or ex-employee from working in the industry in which they have decided to make a living anywhere in the United States of America for one (1) year. Right? Do you see that written here? So I did some digging and in Georgia and Nevada found;

http://library.findlaw.com/1999/Jul/1/126606.html

Enforceability of Non-Compete and other Restrictive Covenants In Employment Agreements

By David L. Turner of Schulten Ward & Turner, LLP

Many employers utilize employment contracts which contain restrictive covenants in order to protect their legitimate interests in their customers and proprietary business information. Restrictive covenants, which include non-compete, non-solicit and non-disclosure covenants, are closely scrutinized by the Georgia courts in employment agreements, primarily because of the perceived inequality of bargaining power between employer and employee. The courts also place great emphasis on the employee's right to earn a living, usually discussed in terms of the privilege of free competition. Even though there are a great many reported decisions in this area, the enforceability of restrictive covenants is usually subject to uncertainty in any particular case.

An initial distinction must be made between covenants entered into as part of the sale of a business, versus covenants which are included in employment contracts. Covenants entered into as part of the sale of a business are usually enforceable, at least in part. The rationale for this distinction is that a sale of business contract is far more likely to be entered into by parties on equal footing. In addition, the courts recognize that such covenants are often necessary to protect the value bargained for by the purchaser of a business. For these reasons, lesser scrutiny is also applied to restrictive covenants in partnership agreements.

While contracts in restraint of trade or tending to lessen competition are against public policy and are therefor unenforceable, restrictive covenants in employment contracts are considered to be in partial restraint of trade and will be upheld if strictly limited (1) as to time; (2) as to territorial effect, and; (3) are otherwise reasonable, considering the scope of the employer's business interest sought to be protected and the effect on the employee. This three-element test has been described by the courts as a "helpful tool" in examining the reasonableness of the covenants being evaluated. The judge, rather than the jury, applies this test and determines whether the restraints are reasonable.

The Georgia courts have often refused to enforce restrictive covenants which prohibit a former employee from passively accepting business from clients of the former employer, where no solicitation has occurred. One stated rationale for this rule is that to hold otherwise would unreasonably impact the public's ability to choose service providers. The court is usually able to strike down virtually any covenant on this ground if it is so inclined, because most employers will find it counterproductive to expressly state in the contract that former employees are entitled to passively accept business. Even if the employer opts to do so, a thorny fact question will frequently exist as to whether the former employee has solicited or merely accepted business. A disputed question of fact will preclude the issuance of a preliminary injunction, a remedy which is often sought by employers.

The bottom line is that employers must carefully craft employment contracts which contain non-compete, non-solicit and non-disclosure provisions if the employer ever tends to legally enforce the agreement. Employers which elect to include broad restrictive language in employment contracts are likely to receive a hostile reception in the courts.

http://www.lawserver.com/law/articles/non-competition-agreements-in-nevada

Non-competition agreements, also known as covenants not to compete or restrictive covenants are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer's legitimate business interests from an unfair competitive advantage with the employee's right to work in a field for which he or she is trained.

Nevada courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Nevada

Nevada law generally prohibits an employer from willfully preventing a former employee from obtaining employment elsewhere in the state. But the statute does specifically allow non-competition or non-disclosure agreements that restrict a former employee from:

• pursuing a similar vocation or becoming employed by a competitor" of the former employer or
• disclosing any trade secrets, customer lists or other confidential information obtained during the employment

as long as the agreement is supported by consideration and is reasonable in terms of geographic scope and duration.

• have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect a legitimate business interest of the employer. Factors considered when determining reasonableness include the hardship an agreement puts on the former employee, its effect on the general public and the restrictions placed on time, territory and activity of the former employee.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. While Nevada courts have not specifically addressed whether the offer of initial employment is sufficient consideration, or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate, they have enforced such agreements. On the other hand, the Nevada Supreme Court has held that an at-will employee’s continued employment is sufficient consideration for enforcing a non-competition agreement.

Reasonableness in Time and Geographic Scope

Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration and geographic scope. If a court finds an agreement is unreasonable, it may modify the agreement so that it does not unduly infringe on the former employee's ability to work.

The courts have found restrictive covenants unreasonable or used the "blue pencil" rule to modify agreements….

BLUE Pencil Rule

They do use a “Blue Pencil” rule in Nevada but not in Georgia. This is a determination that one part of a contract which is proven to be out of whack or unenforceable can negate the entire contract. That is if the court should choose to do so. Remember the paranoid “don’t talk bad about us” clause we discussed last month? Maybe we see a bit more of that paranoia in this company when reading this covenant as well.

Remember that “Standard Practice” for this company is to import labor from outside of the United States of America and after six (6) months or so of employment laying them off. Should the courts determine this “Standard Practice” is less than legal or possibly unsupportable by state or federal law then maybe the employee can take a stand and get their final salary and expenses? Withholding salary and expenses is not supported by most states employment laws. This has also been a “Standard Practice” of our mystery employer…

So remember campers if it is written in such a way that it is unenforceable, it’s bark might be worse than its bite.