This article addresses a challenge that employers face in enforcing non-competition agreements that are attached to employees’ general employment contracts and will offer a solution, which will increase the probability of enforcement. On the surface, the non-compete agreement appears to be a relatively straight forward contract, which provides that an employee will refrain from competing against his or her former employer within a certain geographic area for a predetermined amount of time. However, this seemly simple agreement can be surprisingly hard to enforce.
In Massachusetts, over the last several years, non-compete agreements have seen increased scrutiny from the courts. Not only are employers facing the traditional challenges of enforcement (reasonableness as to time, geography and scope) but employers are also facing a wave of theoretical arguments premised upon the idea that any restraint on trade is fundamentally unfair and against public policy. Given this shifting legal landscape, an employer must use every angle available to increase the probability that the company’s non-compete agreements will be enforced.
In many situations, if not the majority, an employee’s non-compete clause is contained within his or her general employment contract. On the surface, this appears to be reasonable. Including the non-compete within the standard employment contract ensures that all the obligations of the parties are contained within one document. However, this convenience can become problematic when employers seek enforcement of the non-compete clause in certain circumstances.
It is well established that a material breach by one party to a contract excuses the other party from further performance under that contract. This principle of general contract law applies equally in the employment context. Therefore, an employer’s breach of the employment agreement may discharge an employee from further obligations under his or her non-compete clause. In fact, the courts have held that even if the employee continues to work for the employer after the employer’s material breach, the law holds that the employee then becomes an “at-will” employee without a governing employment agreement. Not surprisingly, the “employer’s breach” has become a standard defense in non-compete litigation. However, employers can easily avoid this pitfall.
Massachusetts’ law states that if a non-compete provision is a separate agreement entered into between the parties, an employer’s breach of the general employment contract will not excuse an employee from his obligations under the separate and distinct non-compete agreement. However, it should be noted that simply drafting the non-compete as a separate agreement is insufficient. In order for the separate non-compete agreement to be enforceable there must be new and distinct consideration – separate from the consideration given for the general employment agreement. Unfortunately, this step is often forgotten by employers and can result in prolonged litigation, and, more importantly, sabotage an otherwise well drafted non-compete clause.
To avoid this predicament, employers should: (1) make all non-compete clauses separate agreements; (2) resist the temptation to attach the non-compete to the employee’s standard employment agreement or other employment documents; and (3) give the employee new consideration for the separate and distinct non-compete agreement. If the employer follows those simple steps, then, regardless of any problems with the general employment contract, the non-compete will stand on its own and have a better chance of being enforced.
Ward v. American Mut. Liab. Ins. Co., 15 Mass.App.Ct. 98 (1983).
Lantor Inc. v. Ellis, 9 Mass.L.Rptr. 221, *8 (1998); Ward, supra at 101.
Ward, supra at 101; Lantor Inc., supra at *8.
Lantor Inc., supra at *9 (1998).
Intertek Testing Services NA, Inc. v. Dash, 13 Mass.L.Rptr. 530 (2001); Williston on Contracts, § 39.2 at p. 512.
Dialogo LLC v. Bauza, 456 F.Supp.2d. 219, 226 (D. Mass., 2006).