What Is a Non-Compete Agreement?
Non-compete agreements are contracts that prohibit employees from joining competitors or starting a competing business within a certain time period after the employment ends. These restrictive covenants are often included in employment contracts to protect an employer from losing business, revenue, customers and confidential information. They can also take the form of non-solicitation agreements, which prevent former employees from hiring other employees from a company or soliciting customers who work with their former employer.
Non-compete agreements can be extremely broad and encompass any area of the industry in which the company does business. Others may simply attempt to block competitors in a particular market, territory or customer base for a specific period of time .
Most states consider a valid non-compete agreement to be enforceable so long as it is part of a quid pro quo — an exchange of value between the parties. In Connecticut in particular, courts have the discretion to order a three-month reduction of any purported five-year restriction unless the employee agrees with that assessment. Either way, the employer has the option of not seeking such a remedy.
In addition to being unenforceable because of an excessively long time period or an overly broad geographic area, non-compete clauses can be invalidated for several other reasons:
Even if a non-compete clause is deemed reasonable, an employee who fails to comply with its terms may not be denied unemployment benefits if she had not signed a copy of the agreement.
Statutory Requirements for Non-Competes in Connecticut
In order to be valid and enforceable in Connecticut, an agreement not to compete must be reasonable, both in its time duration and geographical scope. Specifically, the former should be no more than one year and the latter should be limited to those areas in which the employer actually conducts business or has plans to expand into. These principles were provided by the Connecticut Supreme Court in Found. Medicine v. Curi, 119 Conn. App. 1, 8, 986 A.2d 257 (2009). In practice, however, the resolution of such issues is highly fact specific and will require a thorough review of the individual circumstances. Notably, different factual scenarios can yield different judicial outcomes.
Connecticut law has also established the criteria under which it will uphold the covenants. Such contracts will be upheld as long as the following three factors are satisfied:
Additionally, the nature of the business in which the employee is engaged, as well as the industry as a whole, must be taken into consideration. Furthermore, a non-compete agreement between a business and a seller of a company will typically be upheld as long as it only prohibits the seller from engaging in the same business as the acquired company for a period of no longer than five years. This principle was established by the Connecticut Superior Court in Premier Capital, LLC v. Conaway, 2008 WL 4539428, at *8 (2008) when it noted that, "[w]hile there is some authority for the proposition that five years is . . . too long [for a restrictive covenant], this suggestion is not determinative". See also, Forster v. Ropes, Gray, B. & Flager, 70 F. Supp. 353, 355 (D. Mass. 1947), citing Shubert v. Wahl, 192 S.W. (2d) 237, 243 (Tex.) ("I think five years is the outer limit for a covenant not to compete").
Essential Components of Valid Non-Compete Agreements
In order to be enforceable a non-compete must be reasonably limited in its scope. As part of that inquiry, the parties should agree to a geographic restriction. For example, if an employee is a sales person for a medical device company, the geographic limit would be reasonable limited to the territory where he/she sells goods for the company (which might be only a few counties). However, if the business sells its goods nationally, and the employee has access to information he/she could turn over to a competitor, a statewide, if not national, geographic limitation may be highly relevant.
The duration of a non-compete is commensurate with the amount of confidential information being protected. In Connecticut, courts have enforced non-competes of up to two years following termination of employment; sometimes longer if the sale of a company is involved and the time period is needed for the buyer to take advantage of the business operation.
In order for a covenant not to compete to be enforceable, the employee must receive a benefit in exchange for the covenant, called "consideration." Usually, the consideration is provided upon hiring and the additional consideration might be the benefit of a promotion or raise. A non-compete added as a term of continued employment without any other additional consideration (besides continued employment) is unlikely to be enforceable.
Types of Industries That Use Non-Compete Agreements In Connecticut
Most businesses want to hire employees and contractors that are going to be a good fit for their company and not leave the business hanging dry as soon as they feel like it. Non-competition agreements, or non-compete agreements, were created to combat this exact concern. These agreements also deter current employees from leaving the company as well as future employees from ever even considering working for a competitor. There are many types of industries that implement non-compete agreements to help protect themselves and their assets. These industries include, but are not limited to lawyers, architects, accountants, and tech employees.
Lawyers – As lawyers we know that information and client relationships are everything. Many people crave this career because they want to help others. But, in order to make money you must have clients and in order to keep your clients you must provide proper services. In order to do this, lawyers create non-competition agreements to entice employees to bring in clients for them.
Architects – Architects, like lawyers, want to have a client base in order to run a successful business. They must protect their intellectual property and their practice in order to be successful due to the fact that client information is vital to helping their business grow.
Accountants – Accountants use non-competition agreements to protect themselves from competition once they train their employees. Accountants hold several important assets to their clients such as ensuring that tax returns are done correctly and generally keeping any information concerning their clients secretive.
Tech Employees – Tech employees tend to use non-competition agreements because it contracts workers for a definite period of time to provide services in a specific industry that can be exclusive or non-exclusive. Tech employees are often privy to confidential, secret and/or proprietary information, and often receive training on programs. This is why employers and employees in this field tend to be privy to using non-competition agreements.
What Employees Need to Know About Non-Competes
Many employees are subject to non-compete agreements. Such non-competes may take the following forms: Technically known as "restrictive covenants," non-compete agreements in the employment context will only be enforced if they meet certain limitations. Specifically, such agreements must be no greater than necessary to protect the employer’s legitimate interest, have an effect reasonable in time and space, and not be unduly burdensome or injurious to the public. Maximus, Inc. v. Serv. Employees Int’l Union, Local 668, 188 F. Supp. 2d 205, 216 (M.D. Pa. 2002). Other than the foregoing limitations, there are several situations in which non-compete provisions within an employment agreement may not be enforced. The Connecticut Supreme Court has stated that "an employer who promises one a job despite his existing employer’s contract with another entity, and induces him to violate that contract, may not subsequently enforce the contractual restrictions contained in an employment contract against that same person." Novametrix Med. Sys., Inc. v. Busey, 283 Conn. 62, 75-76 (2007). Moreover, a non-compete covenant in an employment agreement that is a part of a fraudulent scheme or illegal act will not be enforced. Id. at 76. Employees stuck in such a situation may challenge the enforcement of the non-compete, and this is true even where "the party seeking to enjoin [the employee] had no knowledge of the fraud or illegal act that underlies [the employee’s] contention." Id. See also Regal-Beloit Corp. v. Usibelli , 25 F. Supp. 3d 1162, 1172 (D. Alaska 2014) ("if an employer induces an employee to breach his prior contract, either by offering employment in violation of his contract or otherwise inducing him to breach the contract, the employer is estopped from enforcing its own contract with him") (citations omitted); DSW, Inc. v. Stone, No. 2:07 CV 1040, 2008 WL 4504270, at *5 (S.D. Ohio Sep. 30, 2008) (to allow for enforcement of a non-compete where the employee "was merely attempting to get out from under a contractual noncompete provision would be manifestly unjust"), aff’d, 588 F.3d 503 (6th Cir. 2009). Moreover, even where an employee is not induced by the employer to breach a contract, but the employer was aware, or should have been aware, of the employee’s contractual obligations prior to hiring the employee, equity may cut against enforcement of the non-compete. See SMC Corp. v. Lockwood Green, Inc., 929 F. Supp. 1521, 1534 (N.D. Ga. 1996), rev’d on other grounds by 83 F.3d 1071 (11th Cir. 1996) (affirming trial court’s ruling that plaintiff was estopped from enforcing restrictive covenant in contract where an employee "was not misled by [plaintiff] concerning [his] responsibility for breach of the [confidentiality agreement], but [plaintiff] was well aware of the [confidentiality agreement] prior to hiring [the employee]").
How Non-Competes Impact Your Employment in Connecticut
The impact of non-competes on employment in Connecticut is significant. On the one hand, they can be a vital tool for many employers; on the other, they can be an obstacle to an employee’s future fortunes.
In Connecticut, employees have a right to work and shouldn’t be bound by anti-competitive conditions that bar them from future work opportunities. Non-competes goals are just that – to try to limit competition against them. Employers aren’t guaranteed to be lucky in hiring employees who will cooperatively sign them. While most employees will begrudgingly agree to them, it doesn’t mean that they are lawful.
Many employees don’t think much about a non-compete agreement when they are asked to sign one. They may assume they have no choice – which may be true. They may think of it as something that only applies after they leave the employer, so it won’t be an issue now. Or, they may even believe that it only applies to certain aspects of their work and not all of their rights after departure.
In fact, many non-competes are drafted poorly, and only have the words "reasonable restraint" as a limitation. However, this isn’t a requirement per state legislation, and an employer may assert that the non-compete is valuable to the employer regardless of whether it is "reasonable". Generally speaking, unless it’s unreasonable on its face, meaning that given it the restraint appears to be more than twenty years in terms of time, or applying to all businesses in Connecticut regardless of size or customers, a Connecticut court will enforce it. Even if the court doesn’t agree with what the company was trying to do, it will uphold the restrictions as long as those restrictions aren’t clear competitors.
Likewise, non-competes in CT do not require any built-in time period for their enforcement. When an employee agree to them, they will bind that employee for one year after their departure. Companies may go beyond that period when they sue their former employees, perhaps because they can’t find another job.
When considering whether a non-compete is impacted by state legislation, try to determine if it is enforcing what it says, particularly in restrictive-aspect. If there is any question about the intent of the restraint contained in the non-compete agreement, a review of cases where challenges to non-compete agreements were successful is crucial.
Employers hold a great deal of power in the negotiation and drafting of non-compete agreements. They can dictate the terms and ultimately the future careers of their employees if there are no limits on its enforcement. As a result, employees should be informed on their rights about what they can agree to.
In short, if it’s poorly written or vague, it isn’t binding. If a court or company has enforced an overbroad non-compete agreement, these could technically apply their efforts to nearby businesses. Likewise, restrictions designed to protect intellectual property from independent operation are not in the bounds of trade secrets.
At its core, Connecticut law supports non-competes that are:
If an employee decides to leave an employer who adopted an overly expansive civil non-compete agreement, the employee should consider asking the court for a declaration of adequacy. Otherwise, these agreements will be binding in their broadest interpretation.
Alternatives to Non-Competes
When it comes to protecting proprietary information, trade secrets, and customer relationships, most employers in Connecticut are likely familiar with non-compete agreements, even if they’ve not used them themselves. Still, this does not mean there are not other alternatives to non-compete agreements.
One of those alternatives is a non-solicitation agreement. Non-solicitation agreements prohibit the employee from soliciting a company’s customers after leaving the company, and most businesses will include these agreements in their employment contracts, but strictly limiting an employee’s right to work aside, what good do they do?
A recent case out of the Second Circuit Court of Appeals, an intermediate appeals court for federal cases in Connecticut, New York and Vermont, called Fonda Group, Inc. v. Bryce mentions in dicta an intended limitation on the scope of non-solicitation agreements: "[Courts] have further recognized an implied exception when an at-will employment agreement explicitly allows an employer to terminate an employee within an agreed notice period, but when the employer terminates ‘without cause’ that employee does not lose the pre-termination rights he otherwise would have under the non-compete agreement."
So limiting the obligations that flow from the non-solicitation agreement to only those that arose during the term of the employment relationship could be one way that companies could limit non-compete agreements and avoid legal challenges.
Another alternative to a non-compete is a confidentiality agreement. In an earlier section of the blog on "what non-compete agreements can and cannot do", we discussed how non-compete agreements can prevent an employee from using and accessing proprietary information if they leave the company, but they do not typically set a time cap on how long that restriction will last. A confidentiality agreement could be used in this manner to limit the amount of time a company’s proprietary information has a chance to permeate an industry or community as a whole and dilute the value of said information to the initial employer.
A new Connecticut case, E. Mishan & Sons, Inc. (aka "Bennett") v. Fuhst, supports the use of both non-solicitation and confidentiality agreements. The defendants in the case appealed a trial court decision to issue a preliminary injunction against them. (A preliminary injunction does not resolve the whole case and is meant to preserve the status quo until a final decision is made.) The preliminary injunction at issue limited former employees from contacting nearly 25% of their employer’s customer base for the following five years.
The defendants argued that the scope of the injunction was overbroad because the customers the defendants were restricted from calling would not remember who the employer was or what they did for the customer five years down the road. The plaintiff argued, however, that certain customers would not only remember what the plaintiff did for the customer, but also would potentially have additional work that they would like done after the period of the preliminary injunction expired. The court denied the motion, but this dialogue may provide companies some breathing space if the company is trying to limit the scope of a non-compete agreement. In other words, it is a nice reminder that customers and relationships created with a company are meaningful and do not fade away after two years.
Using these two examples, the creativity of lawyers can turn an employer’s dream of limiting attrition into a reality.
When to Consult An Attorney Regarding Non-Competes
Whether you are presented with a non-compete agreement or drafting one for an employee , understanding the contours of these instruments in Connecticut and other states is essential. Non-compete agreements tend to be ambiguous on their face but can have far-reaching effects in the jurisdictions where they are signed. Seeking the counsel of Connecticut attorneys is important before signing on the dotted line as mistakes made can have lasting consequences. Whether you are an employer or an employee, seeking legal advice is the best way to discover the best path forward.