Business Law Articles
Written By: Keith B. Sieczkowski
Corpus Christi, Texas
Either by statute or court decisions, noncompetition provisions in employment agreements are often treated differently than noncompetition provisions included in the sale of a business. Counsel should be aware of the potential for competing public policy interests to better anticipate possible alternatives.
Essentially, all states consider keeping individuals from working a restraint of trade. Because non-competition agreements are a restraint of trade many states take a strict construction of the drafting and enforceability of a non-compete agreement. Consequently, unless the specific requirements of the particular state are met, employment noncompetition provisions will generally not be enforced. For example, as part of its statute allowing noncompetition agreements, Louisiana requires listing the actual parishes where the employee is precluded from competing. Various court decisions have held that simply listing an area of noncompetition rather than the actual parish names violates the statute and; therefore, the noncompetition agreement would not be enforceable. On the other hand, other states would consider it appropriate to describe a noncompetition provision in terms of miles, such as within 100 miles of an office. Because of the differences between states, it is important to understand the potential issues that can arise in the location where a noncompetition agreement is intended to be enforced.
Many agreements attempt to avoid issues of differing laws between the states by having a “choice of law” provision. A Choice of Law provision seeks to ensure that the interpretation and application of an agreement is consistent regardless of the state in which enforcement is sought. For example, it may be that an agreement provides that the parties agree that the law of Delaware would apply to the interpretation and enforcement of an agreement. Depending on the terms involved and the particular activity to be enforced, the parties’ Choice of Law provisions are generally enforceable unless the court decides that to do so would be a violation of the public policy of the particular state.
Importantly, cases in a number of states have concluded that whether a person is allowed to engage in any form of employment within a state’s boarders is to be determined by the law of the state where the activity is taking place. So, regardless of the parties’ Choice of Law provision, states generally apply their own state law when deciding if a non-compete is enforceable within its borders. For multi-state companies, this burden must be considered when drafting enforceable non-competition agreements.
Noncompetition clauses associated with the sale and purchase of a business are often treated differently than noncompetition provisions solely related to employment. The reason to have the clause in a purchase transaction is apparent – a person does not want to buy a business to have the former owner compete against him. Some states have separate provisions for business purchases. However, even when no statute exists courts have generally recognized the enforceability of noncompetition agreements in purchase agreements.
There is no standard non-compete agreement that can be used all the time, for all situations, regardless of the states involved. As we recently observed with the Marsh decision in Texas, even when a specific statute exists outlining the requirements of a provision, non-competes are regularly the subject of judicial interpretation since so much is dependent on public policy. This can sometimes lead to divergent results. For example, often the sale of a business includes the employment of certain key persons, frequently the persons who just sold the business. Assume the agreements provide that they are to be interpreted and applied consistent with Delaware law, but the business actually being sold is in Louisiana and that is where the employment of the seller is to take place. I have found at least one case that was faced with this fact pattern. The court applied the parties’ Choice of Law provision with respect to a non-competition agreement in the purchase agreement, but the employment non-compete was interpreted under local state law regardless of the Choice of Law provision.
Because of the ever changing nature of public policy, it is recommended that all agreements contain a “blue pencil” or reformation provision to allow for the potential myriad of enforcement interpretations. This will allow the court to apply the agreement at least to the extent that the state would allow. Without an appropriate provision, some courts have gone so far as to indicate that if specific statutory and/or judicial requirements are not met the noncompetition provision is void. An appropriate blue pencil or reformation provision would allow the court to modify the provision to meet the state requirements and then be enforced. To be sure, not all courts will apply a blue pencil or reformation provision the same, but if the alternative is no enforcement at all, in most situations having such an option is preferable.
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