Many employers have long believed that restrictive covenants afford them protections when employees depart to work for competitors. The underlying premise is that these sorts of provisions continue to guard the goodwill the employee generated for the company after he or she departs. If their covenants were reasonable in geographic scope and duration, most employers have understood that they would be enforceable. However, even presumably sophisticated employers now are being exposed as naive.
The economy is a factor
First, many courts are looking at non-compete provisions with an especially critical eye in these challenging economic times. Not only are courts currently flyspecking restrictive covenants to determine if they are reasonable in geographic breadth and time, but some also have been asking whether they sustain any viability when employees change positions during the term of their employment. The theory is that the goodwill associated with restrictive covenants when an employee is hired differs from the goodwill the employee has generated in the position to which he or she was promoted.
Courts may not enforce non-compete provisions after an employee changes roles
In Massachusetts in 2004, Superior Court Justice Julian Houston found non-competition provisions unenforceable when an employee had been promoted to senior product manager and refused to re-sign his previous agreement. The court found that the employee’s new position involved a new title, new responsibilities and a material change in his employment relationship with his employer. Under those circumstances, the court found the employee’s original non-competition agreement to be unenforceable.
Justice Houston’s decision followed rulings by two other federal courts in Massachusetts. In 2000, Judge Nancy Gertner denied a preliminary injunction to an employer trying to enforce a non-competition agreement for an employee who had been hired as a quality analyst when he signed his agreement, and then promoted twice thereafter without signing a new agreement.
Similarly, Judge Richard Stearns refused to enforce a non-compete after an employee had been elevated to sales manager. In 2006, a judge in the U.S. District Court for the Eastern District of New York affirmed the approach enunciated by Judges Houston, Gertner and Stearns.
More recently, in 2010, the Superior Court in Rhode Island, in a case involving Bradford Soap International Inc., upheld an employment contract because the evidence suggested that the parties had not intended to change it. The implication was that had the facts suggested that the employee believed that his new position in the UK altered his employment relationship, any related non-competition provisions would have been in jeopardy.
States are getting into this act legislatively. Oregon, for instance, has a statute deeming non-compete agreements void upon subsequent employment advancement.
In sum, employers would do themselves a favor by requiring employees to whom they offer promotions to sign, as a pre-condition, new non-competition agreements reflective of their changed positions.