Non-compete agreements can infringe intellectual property

Industries that rely on the development of technical innovation routinely require the execution of confidentiality agreements, which specify the employee's obligation to maintain the secrecy of the employer's confidential, proprietary and trade secret information.

In addition to the protections provided by memorializing the obligation of confidentiality during the course of the employment relationship, many employers use post-employment non-compete agreements in order to reduce the risk of unfair competition by continuing the obligation of confidentiality for an extended period after termination of the employment relationship.

By using such agreements to extend the period of confidentiality post-employment, however, the former employer can also significantly restrict the ability of the employee to either compete directly or obtain meaningful new employment in his chosen field.

Not only do these situations tend to reduce competition in a manner that does not serve the interests of the greater public, these types of agreements also place a significant impediment on the rights of workers to better their economic conditions through more rewarding employment.

For these reasons, many jurisdictions limit (or even prohibit ab initio) the use of agreements that prevent an employee accepting competing post-employment. Employers seeking to implement post-employment non-compete agreements need to be aware that there can be a wide variation in the extent to which these agreements can be enforced.

Whether in the People's Republic of China or the United States, prospective employers almost always have greater leverage in negotiating the terms and conditions of an employment agreement.

Even where employees are unwilling or uncomfortable in signing an agreement that may limit their ability to compete in the future should they change employment, economic realities result in employees voluntarily signing these agreements in order to be hired by their new employers.

Only after an employee has left to join another employer does the employee raise objections or question the validity of the non-compete agreement.

But whether raised first by the former employee who is concerned about the restriction on their ability to seek other employment, or in connection with a former employer who is now raising concerns about the actions of the former employee, the employee will typically seek to have the agreement declared void and/or unenforceable as against public policies or general principles of good faith and fairness.

In many jurisdictions including China and several states within the United States enforceability of a post-employment non-compete agreement is generally available, subject to questions concerning the reasonableness of the amount of compensation to be paid the employee during the post-employment period and whether the scope of the non-compete provision is reasonable in terms of duration, geographic restrictions and manner of competition.

While many jurisdictions that apply this type of analysis do not have a standard on the amount of compensation that would be sufficient to uphold the restriction, compensation substantially equal to the amount that would have been earned by the employee at his previous position will generally be held to be sufficient and reasonable.

Where the enforceability of the post-employment non-compete agreement turns on the reasonableness of the durational and geographic restrictions, most jurisdictions will look carefully at the nature of the business as well as the previous position of the employee in the organizational hierarchy in comparison with his post-termination activities.

If the former employee is only a line-engineer or in a position where they would not normally have had access to business secrets, a broad post-termination non-compete will likely be deemed invalid.

Similarly, post-termination restrictions that do not bear a reasonable relationship to the business activities of the prior employer will have a difficult time withstanding scrutiny.

Finally, even where the post-termination non-compete is permitted the duration must be reasonable, with two years often described by the courts as an outside length of time that will be approved - and then only where the new employer is in a directly competitive business relationship with the original employer.

In contrast with jurisdictions where post-termination non-compete agreements are judicially enforced, some states within the United States unequivocally deem them void as against public policy.

The most notable jurisdiction that holds this view is California, which has rejected consistently attempts to enforce such agreements in light of the strong public policy of protecting the rights of its citizens to pursue any lawful employment and enterprise of their choice.

These rights have been deemed paramount to the competitive business interests of the employer, as long as neither the employee nor the new employer has engaged in any illegal acts accompanying the employment change.

But employers who use such agreements for their employees that reside in California even though judicially unenforceable, in the belief that the mere existence of these agreements will serve a prophylactic purpose, also face the risk of liability for engaging in conduct that may constitute unfair competition.

Companies faced with competition from former employees in jurisdictions that will not enforce post-termination non-compete agreements are not without recourse or protection.

While there is no "common law trade secret exception" that serves to validate an otherwise unenforceable post-termination non-compete agreement, the former employer should be able to secure an injunction that prohibits the former employee from competing to the extent trade secrets obtained during the previous employment are being used in the course of the complained of competitive activities.

This distinction underscores the difference between limiting the ability to enforce privately negotiated contractual clauses and the right to seek relief for activities that society seeks to limit as it constitutes tortious conduct.

Companies that have employees in multiple jurisdictions need to carefully consider the extent to which each jurisdiction will enforce post-termination non-compete agreements and, where enforceable, whether the restrictions imposed will be considered reasonable in terms of the amount of compensation, time or geographic limitations.

In such situations different iterations may be used, tailored to the specific jurisdictions in which the employer operates.

Typically, the fact that a company uses different forms of agreements in different jurisdictions will not serve as a basis for concluding that the company acted improperly with respect to a specific transaction involving an agreement that is permitted in the jurisdiction governing the specific dispute.

Chris Scott Graham is managing partner, Silicon Valley, for the law firm Dechert LLP in Mountain View, California. The opinions expressed in the article are his own.

(China Daily 12/28/2009 page9)