Editorial: Noncompetition Agreements: A Call For Judicial Reform

The Connecticut Law Tribune

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This past summer, Gov. Dannel Malloy quietly vetoed Public Act No. 13-309, "An Act Concerning Employer Use of Non-Compete Agreements." That act would have made a minor change to noncompete agreement rules in Connecticut. It failed, but continuing legislative efforts to tweak the law underscore its current weaknesses. There are, of course, two broad categories of noncompetition agreements: those arising from the sale of a business and those imposed by an employer to prevent its employees from competing after leaving that workforce. This editorial is concerned with only the second of these. Noncompetition agreements have a valid place in today's economy, but their growing use to stifle healthy marketplace competition, their theoretical underpinnings as a strained corollary to the employment at-will rule and the disproportionate bargaining strength often used by employers to obtain them have infected these contracts with a taint of inherent unfairness and commercial impropriety. There is a need for reform—reform carried out through the process of common law evolution.

The basic tests for judging noncompetes are well known. Supporting consideration, reasonable geographic scope and temporal duration, the fairness of the protection afforded the employer, the extent of restraint on the employee's ability to perform his trade and the public's interest are all to be considered. In practice, however, most courts unduly restrict their focus to an agreement's geographic scope and duration. Questions about consideration, the employer's protected interest, the employee's ability to work and the public's interest are seated in the back of the jurisprudential bus.

State legislators have repeatedly considered noncompetition agreements and have unsuccessfully sought to reform them. They have produced bills running the gamut from outright prohibition to the vetoed Public Act No. 13-309, an effort to limit them in the context of corporate mergers. Legislative remedies, however, are not the best answer. Such remedies are often drastic and short-sighted. The cure lies in a process of orderly judicial reconsideration and doctrinal evolution. The foundations for reform already exist in the law, but existing principles need to be applied in a more thoughtful manner in order to balance fairly the employer's legitimate business interests, the employee's right to work and the public's stake in unrestrained trade.

First, the question of supporting consideration should be defined by a more rigorous application of the rule of reason. Currently, because employment in Connecticut is at-will and no private-sector employee has a property interest in his job, the consideration issue is murky. There are of course two points at which a noncompete can be entered—first as a condition of a new job and, later, as a requirement to continuing an already established employment relationship, at the "mid-term."

It is well established in Connecticut that giving an applicant a new job is fair consideration for a noncompete. This outlook assumes that the employee seeking new employment has a clear, free choice whether to take the job or not. However, it first overlooks the fact that in some business sectors it is difficult today to find any employment position that is not subject to a noncompetition agreement.

The economic reality is that the employee does not have a choice of whether or not to accept a noncompete, but as a practical matter may only be able to pick which noncompete he will accept. Secondly, this view ignores the failure of many prospective employers to explain adequately the real limitations and obligations imposed on the job seeker's future by the noncompete. Finally, this approach overlooks the bargaining weakness of the job-seeker who has been out of work and looking for a job for a long time. The employee facing a midterm demand that he sign a noncompete finds almost as little sympathy. For example, some contemporary legal writers strongly argue that an employer's promise of continued employment alone is sufficient to support a "midterm" noncompete, even if the employee faces discharge just a day, week or month after executing the contract and despite the fact that refusal to sign would result in immediate job loss, economic hardship or, perhaps, personal financial tragedy. They adopt the peppercorn theory of consideration and, again, ignore the imbalance of bargaining power that exists between employer and employee. This is wrong. A rule of reason should be judicially articulated and applied to the consideration issue, a sliding scale of values that takes into account the true strength of the parties at whatever point in time the agreement was entered.

The noncompete should be held valid only if the consideration obtained by the employer is proportionate both to the loss of economic freedom imposed on the employee and the balance of bargaining power that existed between the worker and the company at the time the agreement was executed. For example, a rule of reasonable consideration might require an employer to continue a worker's employment after signing for a time period that is measured against the noncompete's duration. The employee must remain employed for a proportionate period after agreeing to a noncompete for the contract to be enforced, unless, of course, the employee voluntarily leaves the job or is fired for misbehavior.

Another possibility is for the employer to purchase a noncompete in return either for a significant money payment made when the contract is signed or by an agreement to provide a post-employment severance package. Whatever form taken, consideration commensurate to the burden placed on the employee by the obligations of the noncompete should be a fundamental requirement for enforceability.

Second, courts should give much more stringent consideration to the public's interest in an unrestrained marketplace and the employee's interest in freely pursing his trade after leaving the original job. A free market thrives on open competition. It is throttled by restraints on individual economic freedom. Every time a noncompetition agreement is executed, Connecticut suffers a small loss of market flexibility, a diminishment of its economic vibrancy. When an employee is restrained from working at his trade, the public's competitive interest suffers and the employee often faces severe, sometimes almost insurmountable, personal economic problems. Employers raise trade secret or business investment protection needs to justify noncompete enforcement, and these are valid concerns. But the courts need to measure such claims against the public and employee interests at stake much more thoughtfully.

Employee noncompetes have a valid role to play in Connecticut's economic mosaic; legislative reform would doctrinally freeze them in time and unduly limit the ability to make the measured adjustments in legal doctrine necessary to meeting the state's changing social and economic needs, but the courts should reexamine these contracts in a new light with much more focus on the serious, if often justified, limitations they put on employee rights and the public's interest.

Editorial Board chair Joette Katz recused herself from both the discussion and the vote on this editorial.

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