This article was originally published in Venable's Trade Secrets & Transitions Blog.
Employers are constantly looking for ways to fortify non-competes against attacks on their enforceability. Narrowing the range of the prohibited activity (“you may not do for a competitor what you did for us”) generally solves the “janitor” problem (“Judge, under the express language of the company’s non-compete, my client, who was the Director of Whatever, could not even work as a janitor for a competitor.”). And explaining how the employee’s access to the employer’s secret sauce requires preventing the employee from competing post-employment should help. In the end, there’s money. There’s a common conception that “if we just pay this guy to sit on the sidelines, no one could argue with that.” Sometimes, that conception is a misconception.
Recently a client handed us a non-compete with a recently departed employee (drafted by other counsel) and said “go enforce it.” The employee had agreed in the non-compete that upon his termination, the company could, at its option, pay him his not inconsiderable full salary for six months in exchange for his not working “anywhere in the industry” during that time – and that the company could exercise this option up to four times (for a possible total of 24 months). We argued that the four-option provision was tied to our client’s legitimate business interest of preventing this high-level employee from using his knowledge of our client’s intellectual property for the benefit of a competitor. If our client determined that six months was sufficient to protect its intellectual property, then the non-compete (and the payments) would cease. If, based on developments in the business and the market, the client thought it needed a longer restraint, it would pay for it.
We succeeded in obtaining a temporary restraining order from one judge but later were denied a preliminary injunction by another. The judge who denied the injunction expressed concern that the four-option provision unduly infringed on the employee’s ability to maintain his career and pursue future employment. During the first six months, how could the employee know whether he would be looking for another job in the industry starting in month seven? The judge was concerned that the four-option approach forfeited the employee’s autonomy in favor of the employer’s discretion.
Our suggestion that our client would accept an injunction for less than the 24 months fell flat – in large part because the judge already was concerned about the “anywhere in the industry” language that was broader than our client’s niche business within that industry. Although we felt that in this particular state the judge had the discretion to enforce a whittled-down version of the non-compete – maybe 12 or 18 months of not competing, within the niche, at full pay – this was more judicial re-writing of the document than this judge was prepared to undertake.
“Pay to not play” ordinarily is compelling. This provision struck this judge as a little too complicated. The irony is that if the agreement had simply said, “We’ll pay you not to play for 24 months,” it might have had a better chance of being enforced. Or what if the provision had called for a 24-month pay-to-not-play but gave the employer the option to terminate it upon X months’ prior notice? Would either of these have made the judge more inclined to modify the “anywhere in the industry” language down to our client’s niche? We’ll never know.
Injunction practice is rough justice. Judges frequently are presented with extensive briefs, exhibits, and affidavits, filed on a “hurry-up” basis, followed by an evidentiary hearing featuring distraught witnesses presented by two or more parties, and then requiring a prompt ruling that will determine whether the company will be protected from or vulnerable to competition from its former employee – and determine that former employee’s immediate employment future. Everyone’s blood pressure is up.
Good trial lawyers know how to simplify matters to assist the judge in these pressure cookers. For an employer wishing to enforce a non-compete, that simplicity should begin when the agreement is being drafted. If paying not to play makes sense for your organization, keep it simple. If your “pay to not play” mechanism begins to look like a series of post-employment decisions by the employer that keep the former employee in suspended animation, you probably should consider boiling it down to a concrete payment for a specific period of time. That approach may give you less flexibility, but sometimes less (flexibility) is more (likelihood of enforceability).