Thursday, April 22, 2010

The Restatement and Non-Competes


5.   Covenants Not to Compete  

New Image In my view, § 8.06 does a real service.  Its restatement of the rules regarding when restrictive covenants enforceability has few surprises (with an important exception to be noted), but it adds considerable value in specifying four situations in which such covenants will not be enforced. These are:

· Discharge of the employee “on a basis other than cause”

· Employer bad faith in obtaining the covenant not to compete

· Material breach by the employer; and

· “great public need” outweighing the employer’s interest

While these are all supported by some case law, there is a fair amount of variation in the states, and the section’s focus on these factors is likely to resolve much confusion and reduce the range of opportunistic employer conduct.

    Another service the draft Restatement provides is making clear that courts should not enforce  even reasonable restraints as written if “the employer’s interest could equally be well served by a narrower restraint.” Cmt. c. It suggests that a non-compete clause may be narrowed to a non-solicitation clause in the appropriate circumstances. My quibble here would be that this kind of “least restrictive alternative” analysis be explicitly included in the blackletter. And I might strike “great” from “great public need.”

    More than a quibble would be the disappearance from the Restatement's formulation of a valid restraint the notion that it not unduly burden the former employee. The Reporters Notes observe that courts “seldom, if ever, invalidate covenants solely on this ground,” but the entire omission of the employee’s interest is dramatic. Further, the drafter’s statement that the burden “is a tack-on rationale courts use only when the restrictive covenant is otherwise invalid” may overstate the case.

    Relevant to this discussion might be the confusion about whether “independent consideration” is needed for a valid covenant for a current employee.  Admittedly, this requirement imposed by some states is illogical under ordinary contract theory, which only reinforces the notion that courts are recognizing, if incoherently, that employees’ interests may not be adequately protected by conventional analysis.  If the Restatement is going to do away with the requirement of independent consideration, maybe it shouldn’t be so quick to also do away with the formal standard along the lines that the covenant impose “no undue hardship on the employee."



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Some other countries that allow non-competes, require that the employer compensate the employee during the period of its effect by, for example, paying half the regular compensation. Such a requirement, while not recognized in US law as far as I know, would go a long way toward reining in the abuse that employers otherwise have no incentive not to engage in.

Posted by: Mike Zimmer | Apr 22, 2010 7:38:28 AM

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