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Non-Competition And Non-Solicitation Agreements

On Behalf of | Sep 9, 2011 | Employment Law

In order to protect an employer’s confidential information and good will, it may have certain employees sign a non-competition and non-solicitation agreement. These agreements in addition to prohibiting former employees from using confidential information will, for a time period usually ranging between six months to two years after the employment ceases, prohibit the former employee from either competing with the company or soliciting the company’s customers. When a former employee who has signed such a non-competition or non-solicitation agreement breaches it, the employer can, in addition to seeking monetary damages for the breach, seek a court to force the employee to live up to his bargain through an injunction.

A decision from the First Circuit Court of Appeals which hears appeals from both Massachusetts and New Hampshire federal trial courts addressed what happens when the court rules on the injunction request after the time period for non-competition and non-solicitation has passed. On August 26, 2011, the First Circuit Court of Appeals ruled that EMC Corporations’ injunction request against its former employee, Christopher Blotto, was appropriately approved by the federal trial court prohibiting Blotto’s use of EMC’s confidential business information obtained in that the prohibition lasted for as long as the information remained confidential. The federal trial court was also correct in denying an injunction against Blotto to prohibit him from competing with EMC or soliciting its customers because the one-year period prohibiting competition and soliciting in the agreement passed before any injunction could issue. The agreement between Blotto and EMC had no provision for extending that one-year period during the period Blotto was breaching the agreement. Therefore, the Court determined it could not grant an injunction to prohibit Blotto from doing something that he was no longer prohibited from doing; competing or soliciting customers. As to the prior breaches during the one-year period, the Court found that Blotto could be held liable for damages.

From a practical standpoint, EMC, a business and technology consulting firm, could have concern with a damage claim against Blotto in that not only would it have to show that Blotto’s breach of the agreement caused it to lose business revenue but would have to prove EMC’s probable profit generated from the lost business, after EMC’s variable costs that would have been associated with that loss of business such as its commissions, expenses, and for wages paid to employees to do the consulting work. In pretrial discovery, Blotto could be entitled to certain otherwise confidential financial information from EMC so as to determine what the actual damages would be. Obviously EMC, if now in competition with Blotto, would be legitimately concerned about showing Blotto the markup between what is charged to a customer and what is paid to a consultant, the cost structure, bidding strategy, or other confidential financial or business terms. For that reason, sometimes a damage claim can be a less attractive option for these non-competition cases. Some employers choose to provide a liquidated damage provision for non-competition and if enforceable that could be a good option for the employer.

For an employer to consider what terms they wish to put into a non-competition and non-solicitation agreement, they should consult with their legal counsel to not only determine what terms would most likely be enforceable and obtain the most leverage against a former employee who may consider breaching the agreement, but also the practical effect of insisting that current employees sign those agreements. The courts generally have no problem enforcing confidentiality agreements stating that a former employee cannot use confidential business information and if any employee complains about signing such an agreement, the loss of that employee may be no real loss. However, courts will narrowly construe employee non-competition and non-solicitation agreements and enforce them only to the extent necessary to protect the legitimate business interests of the former employee. Good employees may also be lost over a non-competition and non-solicitation agreements and the employer therefore has to carefully think through the cost and benefit of such agreements in its particular circumstances. One size does not fit all.

J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].