Definition of a Non-Compete Agreement - Paper Example

A non-compete agreement refers to clause in the law of contracts whereby a party, most commonly the employee, makes a legal commitment not to enter into a similar business or profession that is in competition with that of his/her former employer. Courts have often termed non-compete agreements as restrictive covenants and have given several grounds that must be fulfilled for the covenant to be enforceable. The underlying reason behind a non-compete agreements is that; on the termination of their employment, employees might take advantage of the confidential information and trade secrets that they know about their former employer and thereby gain a competitive advantage.

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For the non-compete agreement to be enforceable, they must have a consideration especially when they are signed when the employee is part of the business. Additionally, they must be reasonable. The element of reasonableness of the non-compete agreement was extensively dealt with in Bristol Window & Door, Inc. v Hoogenstyn (2002) where the court held that the restriction should be specific in terms of the length of time of the restraint and the geographical restraint. Additionally, in Radio One, Inc. v. Wooten (2006), the court held that the geographical restriction should not overtly interfere with the ability of the employee to earn a living.

Why an Employer Would Request an Employee to Sign a Non-Compete Agreement

Employers may require employees to sing the non-compete agreement either at the time of employment or during the course of the employment. The core reason for the employers to request employees to sign their non-compete agreements is to ensure that in the case they breach the terms of employment or their services terminated, they do not use the confidential information that they have gained in the organization to create competition by either opening a similar business or working in a rival organization. Additionally, it is meant to ensure that the former employer does not use the trade secrets of the organization for the benefit of a business rival. In most cases, organizations would want their employees to sign the non-compete agreements to avoid competition.

Legitimate Reasons to Request an Employee to Sign a Non-Compete Agreement

One of the key legitimate reasons for the non-compete agreements is the protection of legitimate business interests. It is assumed that during the course of employment, an employee would get to understand the trade secrets of the employer. This is especially the case where the profession is that of technical matters and where certain trade secrets would lead to the manufacture of a particular type of commodity. As such, it is only fair that the employee does not use this information to benefit another rival organization and, therefore, create an unfair competition. To prevent a former employee from exploiting the goodwill and thereby competing with the original employer, it is legitimately necessary to impose a non-compete agreement.

The other legitimate reason for the employer to request the employee to sin a non-compete agreement is to protect any confidential information which if revealed might give a competitor an undue advantage. This information may be related to the manner of operation of the employers organization as well as how a particular product is manufactured. However, in order to qualify the information for protection under the non-competition agreement, the employer must clearly demonstrate that they took all reasonable steps to ensure that the information remains secret and that the revealing of the information would give their competitors an unfair advantage.

Why an Employee Would Agree To Sign a Non-Compete Agreement

An employee would agree to sing a non-compete agreement if it is the precondition for the employment. For example, some organizations require employees to sign the non-compete agreement at the same time that they sign the employment contract. In this regard, the non-compete agreement is clause that is inserted in the main employment contract. Additionally, employers might bring the agreements during the course of employment whereby all employees are required to sign. In this case, it becomes imperative for an employee to agree. The last reason for agreeing to sign the noncompetition agreement for the employee is the consideration that is offered. In this regard, employers would offer a certain value, which would be in exchange of keeping the confidential information and not revealing the trade secrets of the organizations. In such an instance, employees would agree to sign the agreement.

Whether Amazon Has a Good Case against Target

A good case would only arise if the non-compete agreement between Valdez and his former employer (Amazon) was enforceable in the first place and if it is proved that Target aided in the breach of the agreement as a third party. The test of enforceability lies in establishing whether all the material requirements of the agreement have been met. The elements are specifically, that the non-compete agreement ought to have been reasonable. An excellent example of the test of reasonableness was set by the Michigan law of 1987 which stated that non-compete agreements are enforceable if the they seek to protect an employer's reasonable competitive business interests and expressly prohibit an employee from engaging in a line of business after termination of employment. Additionally, the provision provides the test for reasonableness when it states that the agreement would be enforceable if it is reasonable as to its duration, geographical area, and the type of employment or line of business.

Courts are very reluctant to allow former employers to impose unreasonable restrictions in the non-compete agreements. Specifically, they would only allow those agreements that are meant to protect the legitimate business interests of an employer. This was the position held in the case of Bristol Window & Door, Inc. v Hoogenstyn (2002). In this case, the plaintiff, who was a business for the sale of residential homeowners as well as improvement products, filed complaints against the defendants who were former employees. The plaintiff company alleged that the defendants had used its trade secrets by participating in a competing business and thereby disparaging the plaintiffs business contacts and accounts consequently breaching the terms of the noncompetition provisions, which were contained in a contract signed between the parties. The court held that the restrictions should be specific such as naming the off-limits employers for future employment, or the restricted transactions. As such, broad general restrictions would not be viewed by the courts as reasonable.

Courts will review several grounds that for the test of reasonableness. One of those is whether the breach of the non-compete provisions would lead to the disclosure of confidential information. Additionally, the restrictions should not directly interfere with the ability of the former employee to earn a living through his/her talent. More importantly, they would consider the geographical scope and duration of the restrictions. In the case of Rehmann, Robson & Co v McMahon (1991), the court stated that it would not enforce agreements that prevent former employees activities, which pose no known legitimate competitive threat. On the issue of geographical limitation, the reasonableness would depend on the nature of the industry. For example in Lowry Computer Prods v. Head (1997), it was held that a broader geographical scope would attract a greater scrutiny. In terms of the length and duration of the noncompetition restrictions, it is the norm that a broader geographic scope should have a shorter duration. For instance in Thermatool Corp v. Borzym (1998), the courts were of the view that a five-year restriction period was necessary in the case of the sale of business. The last consideration as to whether the non-compete agreement between Valdez and Amazon would be enforceable is that of consideration. Inadequate consideration would be a ground for the challenging of the non-compete agreement. This was the position held in Hayes-Albion v Kuberski (1981) where the former employer had offered inadequate consideration.

From the factors discussed above, it is evident that Amazon does not have a good case against Target. This is because the company did not offer any consideration in exchange for the non-compete agreement with Valdez. Additionally, the geographical restrictions were not stated from a closer reading of the clause. More importantly, there is no evidence that Target has in way contributed to the breach of the non-compete clause as a third party.

Whether Amazon Can Prevent Valdez from Working for Target

Despite Amazon not having a good case against Valdez, they can stop him from working for Target. This would be through the procurement of an injunction. The grant of this injunction would be based on the traditional grounds such as the where Amazon will establish the likelihood of success in the case, the likelihood of the occurrence of irreparable harm, and that of public interest. This was the position taken in Whirlpool Corp v. Burns (2006) where the court granted a temporary injunction refraining a former employee from working in a competitors organization. In this case, the court applied the general principles of the grant of temporary injunctions.

Whether Amazon Can Get Damages from Target

In the scenario where the court establishes that the non-compete covenant was enforceable and finds that Target aided in the breach, Amazon would be able to recover monetary damages. However, this will only happen if the action of breach will be proven with a high degree of certainty. This was the position taken by the courts in Perceptron, Inc. v Sensor Adaptive Machines, Inc (2000) where the plaintiff company had sued for breach of non-compete agreement by the defendant. In the present case, no damages would be recovered as the non-compete contract was not enforceable.

Similar Cases to Amazon v. Target

One similar case to that of Amazon and Target was that of Creech, Inc. v. Brown (2014) dispensed with by a Kentucky court in 2014. In this case, the plaintiff had sued the defendant for the breach of non-compete agreement. However, Brown, the defendant, argued that he signed the agreement because it was his contingent to his continued employment. The court held that the non-compete agreement was lacking a material term and, therefore, not enforceable. In Prairie Rheumatology Associates v. Maria Francis (2013), the plaintiff, a medical practice company providing rheumatology services, sued in order to enforce a restrictive covenant. However, the court quashed a preliminary injunction granted by the lower court because the plaintiff had failed to offer enough consideration to the employee defendant.

Bibliography

Anzivino, Ralph. "Drafting Restrictive Covenants in Employment Contracts." Marq. L. Rev. 94 (2010): 499.

Bristol Window & Door, Inc. v. Hoogenstyn, 250 Mich App 478, 650 NW2d 670 (2002).Creech, Inc. v. Brown, 433 S.W.3d 345 (2014)

Hayes-Albion v Kuberski, 108 Mich App 642, 311 NW2d 122 (1981),

Hegner, Daniel. "Steering Clear of the Inevitable Disclosure Doctrine: Placing the Burden Where It Belongs." U. Det. Mercy L. Rev. 88 (2010): 611.

Jaquith v. Hudson, 5 Mich 123,133 (1858)

Lowry Computer Prods v. Head, 984 F Supp 1111 (ED Mich 1997).

Moffat, Viva R. "Making Non-Competes Unenforceable." Ariz. L. Rev. 54 (2012): 939.

Perceptron, Inc v Sensor Adaptive Machines Inc., 221 F3d 913 (6th Cir 2000)

Perceptron, Inc. v. Sensor Adaptive Machines, Inc., 221 F.3d 913 (6th Cir. 2000)

Prairie Rheumatology Associates v. Maria Francis, 24 N.E...