Noncompete Jurisprudence During The Recession

Article by Larry L. Turner, Daniel Johnson, Jr. and Erica E. Flores

Originally published in Law360 All content Copyright 2003-2010, Portfolio Media, Inc

Law360, New York (February 03, 2010) -- Discouraging anecdotes about unexpected layoffs and endless job searches are now commonplace on every train ride, in every grocery store line and at every dining table. Unfortunately, public pessimism about the economy and its stranglehold on the job market is inevitable given the recent data.

Through November 2009, the national unemployment rate was 10 percent and, although it has dipped recently, there are few signs of a real recovery.1 Indeed, as of Sept. 30, 2009, there were only 2.5 million job openings nationwide, 48 percent fewer than the most recent peak in June 2007.2

The number of layoffs and other involuntary separations has declined somewhat in recent months, but the overall hire rate has not improved.3 On the contrary, over the 12 months ending in September, the nation suffered a net employment loss of 5.2 million jobs.4 In a word, the job market is stagnant.

Against this backdrop, one might expect that the economy's role in cases that seek to enjoin employment pursuant to a noncompetition agreement or other restrictive covenant would have become more prominent over the past year. Remarkably, however, the economy appears to have had no impact whatsoever on noncompete jurisprudence.

Standard noncompetition agreements provide that an employee may not work for a competitor of his employer for a certain period of time within a certain geographic area following the termination of his employment.

Accordingly, in the typical noncompete enforcement case, the employer has sued the employee to prevent him from accepting a job that falls within the scope of such an agreement. At their core, these cases are essentially breach of contract actions in which an injunction, rather than damages, is the primary means of relief.

Noncompete agreements, however, stand in considerable tension with the oft-cited public policy favoring the free flow of labor and ideas.5 As a result, they can be more difficult to enforce than other types of contractual agreements.

In some states, most notably California, noncompetes are of limited use as a matter of public policy.6 And in states where they are enforceable, such as New York and Pennsylvania, they are generally enforced only if they are found to be "reasonable" under the facts and circumstances of the particular case.7

An employer fighting to protect its rights under such an agreement is at something of a disadvantage from the outset. As in any other breach of contract case, the employer must prove that an enforceable agreement exists and that the employee's actions would be a breach of its terms.

Additionally, however — and in stark contrast to most other breach of contract cases — the employer must also convince the court that enforcement of the agreement would be reasonable; in effect, that it would be just and proper under the circumstances.8 It is with regard to this final piece of the employer's burden that the current state of the economy could be extraordinarily compelling.

In evaluating the reasonableness of a noncompetition agreement, courts must balance and attempt to reconcile directly competing interests — the employer's interests in protecting its hard-earned market share and the employee's interest in pursuing a better opportunity for career advancement and personal security.

But everyone is a little skittish during a recession and these interests are consequently heightened. Indeed, employers may be both over-protective of their own intellectual property and more aggressive in their efforts to outpace their competitors, while employees inevitably question their job security and may be easily seduced by the prospect of greener pastures. This kind of anxiety adds innumerable new factors to an already difficult equation.

To be sure, an employee challenging the enforceability of a noncompete could make a compelling argument that the recession cuts against the practicality of the employer's interests and adds to the harm the employee would...