Noncompete agreements limit former employees

John Hammons, attorney and partner with Ellis Ellis Hammons and Johnson, said noncompete agreements are most commonly used in technical and medical fields or in sales.

“Anywhere that would have the most financial impact upon the employer,” he said.

In his previous career as a partner in a CPA firm, Integrity Home Care’s Greg Horton said his agreement covered the possibility of leaving and taking clients with him. “It didn’t really say I couldn’t (compete), but it said if I did, I had to compensate my partners for doing that. ... That’s appropriate,” Horton said.

Now, as Integrity’s chief service officer and one of the company’s three owners, Horton said, “For rank-and-file people, people who are not management level — for nurses, for therapists – to put a noncompete on those individuals is legal entrapment, and that’s the reason it’s done. … Simply to keep them from being able to go anywhere else and from any of your competitors being able to employ them.”

Restrictions

Limitations spelled out in a noncompete agreement commonly include how many years an employee may be restricted from working in that industry, a geographic area the employee is prohibited from working in, or both.

“The law says it has to be reasonable in scope and duration. … If their customers are fairly local, you usually see 50 to 100 miles. It depends on where the customers are,” Hammons said, adding that the time specified is usually two years.

Litigation, Hammons said, is fairly rare, “simply because I think employees typically follow the noncompete, and if the new employers are notified (of) the noncompete, they usually will not be a party to breeching it.” Ninety percent of noncompete litigation, he said, is the result of an employee quitting to go to work for a competitor.

“One thing that employees seldom realize or appreciate is the fact that everything that they have created while working for the employer is the employer’s – customer lists, pricing information, their Rolodex. Employees somehow believe that they have a right to take those with them, but everything that was created while working for the employer in that respect is the employer’s,” Hammons said, adding that the protection of trade secrets is another concern for employers.

But some see noncompetes as a way to prohibit workers from making a living at all. Horton said health care workers sometimes are forced out of their industry and must go into a related field, earn less money, or move if they are unable to work due to a noncompete agreement.

“I have a hard time seeing in health care (that) there are trade secrets. I just don’t see where they exist,” Horton said. “It’s pretty hard for me to buy that a nurse who comes to you with credentials and licensure and all that is somehow not able to (work) somewhere else because they’ve learned some incredible trade secret by working for you. It’s really that legal entrapment, using intimidation; the fear of the lawsuit.”

Integrity does not ask employees to sign noncompete agreements, which Horton said is rare in the industry.

Employer/employee relationship

Once an employer establishes a policy requiring noncompete agreements, Hammons said, consistency is key.

“If (employers) have a practice of allowing people not to sign it, then they risk having a nonenforceable agreement with those who do. … The same applies in whether you enforce them or not,” Hammons said.

Noncompete agreements are usually presented prior to or in the early stages of employment. “There has to be consideration,” Hammons said. “I think it’s probably most appropriate at the beginning of employment because the consideration is you being hired. But it can be mid-term, as long as it’s set out in the agreement what the consideration is – their continuing employment, payment of a bonus, etc.”

Employees have the right to take the document to their own attorneys for review before signing. “If they’re in a competitive marketplace, absolutely,” Hammons said. “They don’t want to agree to something that’s going to affect them or affect their livelihood upon separation.”

Separation anxiety

When considering hiring individuals who have signed noncompete agreements with their previous employers, Hammons said potential employers often check the status of the agreement.

“Many new employers actually send a letter to the past employer and say, ‘We’re thinking of hiring John Doe. It’s our understanding that either he has no noncompete or the noncompete is not applicable to us.’ That puts the burden back on the past employer to object,” Hammons said. “The new employer, if they know they’re hiring someone subject to a noncompete, is potentially interfering with that contractual relationship.”

Horton said that potential employees who are bound by noncompete agreements often approach Integrity about employment opportunities. “Several of those folks have waited the full two years (of their noncompete agreements), and then have come to work for us. It’s pretty sad that they can’t do what they love, but they’re willing to wait,” he said.

Business buyers

Noncompete agreements aren’t just for the employer/employee relationship. When an established business is sold, it’s common for the previous owner to sign one.

“Much of what you’re buying in many transactions is goodwill. That makes the goodwill virtually worthless if the former owner can turn around and start up their own shop again,” Hammons said.

When Dr. Paul Arnold sold Arnold Eye Care Center in 1999, the new owners – Drs. Ken and Leo Neu, James Mattax and Thomas Prater – asked him to sign a noncompete agreement stating he would not practice or consult for five years within a 90-mile radius of Springfield.

“It was sort of a mutual agreement with Dr. Arnold and my group that five years was appropriate because of the value of the practice and the land and the building that we were purchasing,” Prater said.

“In our negotiating with the four doctors involved, one of the things that they wanted to do was make sure that if I was going to do this, I wasn’t going to be in the market anymore,” Arnold said. At the time of the sale, he was ready for a change in his career and had no plans of opening a similar business. He used the time to travel and write a book. In June, he opened a new practice, Arnold Vision.

“I’ve been on both sides of this issue, and I think there are reasonable terms and circumstances, and unreasonable terms and circumstances,” Arnold said. “It really does boil down to the economic benefit derived.”

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