Does This Non-Compete Hold Water?

In My Humble Opinion (IMHO)
#1

A person I know has worked for a company for many years - decades. Recently, the company was bought out by another company in the same industry, naturally without any warning to the employees that such a thing might be happening. Representatives from the new company walked in one Monday morning and, after announcing the transfer, gave all the employees an employment agreement (essentially a non-compete) to sign. All the employees were informed that if they didn’t sign the agreement within X days, they would be terminated. Some of the terms seemed very one-sided for the new owners (e.g., if an employee leaves and gets another job, they need to notify the new employer in writing of the existence of this agreement and provide proof of that to the former employer).

A few weeks later, the new owners announced that the acquired company was being shuttered and all the employees would be terminated. I’m wondering as to the validity of the agreement under these circumstances. I realize that many, if not most people starting a new job are expected to sign such a document, but it almost seems to me that there is an element of duress (probably not technically duress, but hopefully you know what I mean) involved when long term employees of an acquired company are presented with a new agreement like that and told to sign or leave. It’s not like there’s really a free choice under those circumstances, in my view. So what are your thoughts? Would that agreement actually hold up in court?

#2

There’s no way to say without seeing the actual agreement. There are certain conditions of these agreements that courts look on favorably, and others they don’t. In addition the standards of enforcement and validity vary by industry. It’s not duress either, the company was entitled to make a non-disclosure agreement one of their qualifications for the job.

The requirement to inform new employers in writing sounds hokey and I don’t see any possible way for it to be enforced. It’s making a requirement to disclose, never heard of such a thing.

#3

It also depends on where you are. In California, non-compete clauses are generally held to be non-binding.

#4

I conflated non-disclosure and non-compete there, sorry, but the point remains I think.

In terms of non-disclosure the agreement may be worthless because it only covers information the employee acquired after the agreement was signed, which may be nothing in this case. And the basis for a non-compete could turn out to be unjustified for the short term of the agreement. In my experience non-competes are based on consideration for which a few weeks of employment may not be sufficient.

#5

Sorry, I should have specified; this is in New Jersey.

#6

I was wondering about the question of consideration, too. Can continued employment really count as consideration? If you already have the job, are they really giving you anything in consideration for your agreement not to compete? Isn’t that like saying, “If you give me $100, I’ll let you keep your TV set?”

#7

You own the TV set, so not quite. But I doubt continued at-will employment that can be terminated as soon as the agreement is signed would qualify.

#8

Are the terminated employees getting a severance package? How much?

#9

That is irrelevant unless the severance is contingent upon the non-compete agreement. As suranyi notes, it varies widely from state to state. In an employee-friendly state like California, non-compete agreements have to meet strict criteria (specificity, duration, et cetera) in order to be considered valid, e.g. if you come to work for TinySquash in the Stratrocumulous division you cannot leave and work for their direct competitor, Big Yellow Banana in any tropospheric development for X years; the intent being to prevent any employee carrying trade secrets from one company to another during critical stages of development. These agreements also have to have some consideration for the employee and so are generally part of an employment contract (typical for key development or executive positions where the compensation package includes large performance bonuses and other perks). In other, employer friendly states the non-compete agreement may have a wider applicability, but if it is so general that it would prevent the employee from seeking employment and create a hardship I can’t see a court enforcing it. I also can’t see an open-ended obligation to report on your future employment in perpetuity holding any legal authority. In a right-to-work state I supposed an employer could fire you for not signing it, legal or not, but I honestly don’t think an employer would risk the backlash of a lawsuit over such a firing.

I’ve been presented with non-competes three times in my career. One was with a manufacturer in response to some employees leaving and starting their own company; one was with a startup where I was offered a key development position; and one was with an aerospace contractor which also insisted that employees not discuss the agreement with each other. In the first case, I signed it in ignorance, and the company was bought out a year later by a competitor; as far as I know, it was never enforced on any employees as many went to work for other manufacturers. In the second case, I turned the position down (not specifically because of the agreement, but I had little confidence in the company being successful after talking with the principals, and I was correct in that judgment). In the third case, I consulted with my lawyer and flatly refused to sign it; I was pressured once by corporate management to sign, but after again refusing, the issue was dropped. I later left to work at a competitor and when the issue of non-compete was brought up, I pointed out that I’d never signed it, and it was quite entertaining to watch HR and corporate monkeys blaming each other for the oversight.

My rule now is that I don’t sign any employment agreements without reading through in fine detail and being assured that I’m getting some kind of consideration for signing it. If I don’t understand something, I take it to a lawyer who works in employment law. In my experience with these things, they’re rarely drafted or carefully reviewed by a lawyer and are generally written by ignorant corporate bobbleheads to instill fear, uncertainty, and doubt as some kind of bizarrely counterproductive management technique probably learned by reading Al Dunlap’s autobiography.

Stranger

#10

“New Jersey has a strong public policy to afford an individual the right to work and pursue a livelihood. Because of that, employers cannot make their employees sign non-competes for nothing in return. Employees must receive consideration in exchange for signing away their future rights. This consideration can come in the form of future employment (when you sign a non-compete in order to start a job), a severance package (when you sign a non-compete after leaving your job)”

Mark Natale

Associate Attorney at Law Offices of Leo B Dubler III

#11

I’m simply seeing if we can draw out more information from the OP that may be relevant. There may be important facts about the situation we don’t yet know.

#12

Yes. And the consideration has to be comparable to the value of the non-competition. A couple of months severance pay won’t do the job to prevent someone from making a living in their trade.

#13

round here non competes are basically unenforcable under the belief that you can’t stop people from making a living.

the higher up the corporate ladder someone goes, and the more specific they are - the greater chance a non compete can be enforced

#14

There are situations where a non-compete works well. If a guy sells his barbershop he may agree to not opening another barbershop in that town for a year. The contract is reasonable in that case, for the consideration of the sale price of the barber shop, for a limited amount of time, and limited to a specific area. It gets much harder out of those simple circumstances.

#15

Yes, there is a severance package being offered, at a value of something like 4-5 months salary (at least for the person I know; apparently everyone’s package was different, and may have depended on the time of service with the prior company). However, the severance package was offered at the time the terminations were announced. There was no talk of termination when the non-compete was demanded. The new company took over in early December and demanded the non-competes immediately. They then announced the terminations in early January, and at that time offered the severance packages, provided that the employees stayed until their scheduled termination date and signed a release at the time of termination.

So it really doesn’t seem to me that there is any relationship between the non-compete and the severance package; the NC was demanded at a time when no talk of anyone being terminated had been discussed.

#16

Even if the severance were relevant the non-compete might only be good for the 4-5 month period of severance pay.

#17

In every US jurisdiction, a blanket non-competition agreement is generally void for public policy reasons. In most jurisdictions, a limited agreement will be upheld if it is not overly broad in time, space and scope. There is also often a specific exception for discharged employees, since obviously the employee who leaves voluntarily has a stronger bargaining position than one who doesn’t.

For example, a dental practice may require its partners to agree that they will not practice dentistry within 25 miles for two years after leaving the partnership. It cannot require that partners agree to refrain from practicing any form of medicine anywhere ever.

My understanding of New Jersey law is that it will uphold such agreements to protect trade secrets, confidential business information, existing client lists, or “direct hiring” by a customer.

In this particular case, I don’t see that there was any true consideration for the agreement and would not consider myself bound by it. I am not a lawyer licensed in NJ, this is not legal advice, etc.

#18

Non-compete agreements are in most situations completely unenforceable, and exist merely to intimidate employees.

If you’re a major bigwig at a company you might be asked to sign a contract not to work for your direct competition for a certain period of time. As was mentioned above, this agreement has to have some sort of consideration offered in return for the agreement.

Note that there’s a difference between non-compete and non-disclosure agreements. You can’t take Company A’s trade secrets to Company B. That’s a whole different story. However lots of trade secrets are time limited–stuff that isn’t made public yet. Once it’s made public then it’s not secret. As an example, I signed a non-disclosure agreement with Microsoft before I worked on the Xbox One, before the existence of the Xbox One was public. If I had quit the next day and went over to Sony and told them all about it that would get me in legal trouble. Given my position it wasn’t like I was privy to any particular big secrets, but at that time even the existence of the project was secret. Now however I’m free to tell people I worked on the Xbox, even though for a long time working there I wasn’t.

The non-compete is a completely different thing. It is against public policy to keep people from working, and courts will generally refuse to enforce any sort of boilerplate non-compete agreement. The particular agreement your friend signed can be ignored. I’m not a lawyer, but “Sign this or you’re fired. You signed? Good you’re fired” doesn’t sound like something a court would enforce. Nor is it something the employer would pursue, it’s just to create fear, uncertainty, doubt.

#19

Unless the “person I know” is intending to start a business that competes directly with his old employer or is going to be a principal officer in a competing business, I wouldn’t worry about it. If either of these are true, he may want to consult a lawyer. If he was just another cog in the wheel of the organization and can find a job doing a similar job for someone else, as long as he isn’t doing something like taking a clients list or procedures manual or something like that with him, I don’t think he has anything to worry about.

From the description given in the OP, it sounds like a ploy to try to keep employees from jumping ship when the new owners took over. My guess is that its enforcability was questionable when it was originally signed and completely unenforceable once the company shut down and terminated everyone. If the severance included ongoing payments or other support, they may stop those if they found out about it, but I would think that would be about it.

#20

No, she’s not planning to start a business in direct competition with the former employer, but it’s not outside the realm of possibility that she could end up doing similar work for a competitor, or possibly even consulting for one or more of the former employer’s clients, given her deep knowledge of their systems.

To be more specific, the company that was bought out still exists internationally and with some US clients as a division of the company that bought it out. What was shut down was the Corporate HQ in the US only. Much of the work formerly done there is being outsourced to Asia.