After four years of working for a national lawn care company, Jack Deland believes he knows everything about keeping a lawn green. He's also pretty sure about what it would take to make green stuff grow in his wallet if he could start his own lawn care business. He's already saved what little “seed” money he needs to get started. And customers are eager to hire him.
There's just one problem troubling Jack as he sits in his lawyer's office: Jack once signed a contract with his former employer that now forbids him from working in a competing lawn care business.
Who would sign such an agreement? Jack is no different from many people encumbered by a non-compete agreement after leaving a job. Actually, most companies don't have any difficulty with getting their employees to sign these agreements. It often happens at a time when leaving the company is the furthest thing from an employee's mind, such as during the hiring stage or as part of an annual review when the employee is getting a pay raise.
What do these agreements do? A typical non-compete agreement forbids an employee from working in a competing business after leaving the company. The agreement usually specifies a period of time after the employee leaves, and a geographic area in which the employee must refrain from competing. It may include other limitations. Jack's agreement prohibits him from working in any competing lawn care business within a 100-mile radius of his former employer's office for a period of one year.
I signed one of these, what happens if I ignore it? First, you may create ill will between you and your former employer. Depending on the type of business you are in, you may need to be on good terms. Your employer may even be a prospective client if, for example, you work as a consultant.
More seriously, the employer could file a lawsuit against you leaving you liable for money damages, attorney fees and court costs if you lose the suit. Your employer could also get an injunction from the court ordering you to stop competing immediately. In that case, the injunction could actually forbid you from competing for a longer period than your original agreement with the employer. And the worst time to learn that your employer is serious about your non-compete agreement is after you have invested time and money in starting a business.
So what can I do? Read the agreement carefully. You may find you can “live with it” by:
- Avoiding activities that compete. If your ex-employer sold shoes and you want to sell cellular phones, there may not be a problem. Remember: you agreed not to compete, you didn't agree to refrain from going into business.
- Doing business outside of the proscribed area. Suppose your agreement forbids you from working within a 25-mile radius from the office where you used to work. If you had to commute a long way to work in your former job and are now working out of your home with local customers, you can probably comply with the agreement simply by avoiding clients inside of the proscribed radius until the agreement expires.
- Waiting until the agreement expires. If your agreement limits competition for a relatively short period of time, you may be able to live on savings, or do something else, until that period passes. You can also start writing a business plan, getting financing, setting up your home office, and making other preparations while you wait.
In Jack's case, these options won't help. Starting his lawn care company will put him in direct competition with his former employer, his customer base is within a proscribed area, and he can't afford to wait until the agreement expires. If you're in a similar situation, you may still be able to do something about it.
Because non-compete agreements restrict a person's ability to earn a living, many states have taken steps to discourage them. Several state legislatures, including Florida, have recently changed their laws to make it more difficult to enforce the agreements. Courts have also been known to void, or to re-write the terms of, unreasonable ones. Thus, depending on the laws and court decisions in your state, it may be easier to challenge a non-compete agreement than your average contract. Here are some arguments that may work:
- The agreement is unreasonably long or covers an unreasonably wide area. This argument works best if you can show that the terms of your agreement are unusual in your line of work. For example, if Jack can show that most lawn care companies do not use non-compete agreements or that such agreements are usually for only a couple of months instead of a year as his agreement is, the chances of successfully challenging it are better.
- The agreement serves no purpose other than to keep you from working. To make this argument most effectively, think about the reasons your employer asked you to sign an agreement. If it was merely a standard procedure for all employees, you probably stand a chance at getting it changed or voided completely. On the other hand, if your company was concerned about protecting a trade secret--its unique lawn fertilizer formula, for example, or a carefully cultivated customer list--the company's position is stronger. Protecting a significant investment in your training or education may be another valid reason for enforcing a non-compete agreement against you. Let's face it; if your employer paid for your MBA courses and you quit as soon as you got your degree, a court will probably be less sympathetic toward you.
- You weren't given enough in exchange for your signature on the agreement. Occasionally, courts will refuse to enforce a non-compete agreement unless you were given something substantial in return for it. The chances of success with this argument, which lawyers refer to as insufficient “consideration,” depend heavily on your particular state's laws. The argument is, in fact, often unsuccessful.
If you believe that your non-compete agreement will hurt your attempts to start a business, consulting an attorney with employment law experience in your state can be a good idea. Your attorney can tell you if these arguments are valid in your state and may suggest other arguments. He or she may also be able to help you void the agreement or to negotiate new terms that you can live with. Remember that a consultation costs much less than defending a lawsuit.
Given the high costs associated with going to court, most companies actually prefer a workable compromise to an all-out court battle. The key is to achieve that compromise before your employer finds out about competitive activities from a third party--such as a customer you've taken away--and calls in its own lawyers.
This discussion has focused on helping people to understand, and possibly to change, non-compete agreements they may have signed with a former employer. As a business owner, however, you may be interested in requesting such agreements from your own employees or in making sure the ones you use are air-tight. If so, information on non-compete agreements in the Business Owner's Toolkit can help you.