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To Void Or To Modify? Courts Have The Final Say On Voiding Or Rewriting A Non-Compete Agreement

“This has been a trend for a long time; the days of lifetime employment are long since over.”
— Marc Andreeson

Anticipating that employees do not always stay with an employer for the duration of their careers, businesses often seek to protect their interests by requiring their employees to sign non-compete agreements. At stake with a non-compete agreement are, on the one hand, the employer’s desire to protect its proprietary interests in, e.g., its trade secrets, customers and good will and, on the other hand, the employee’s ability to continue to earn a livelihood in the industry in which the employee has experience and in which he/she has invested time, energy and resources.

Businesses need to keep in mind that Rhode Island courts disfavor non-compete agreements between an employer and an employee and require employers seeking to enforce such agreements to demonstrate, among other things, that there is a “legitimate interest” that the agreement is designed to protect and that the agreement does not extend beyond what is necessary to protect that legitimate interest. What constitutes a legitimate interest depends heavily on the facts of the case, but examples include trade secrets, confidential customer lists and information about the business’ proprietary processes. On the other hand, there is no legitimate interest in an employer being free from competition itself. Also, Rhode Island courts have not recognized any legitimate interest in an employer preventing an employee from using the skills or intelligence acquired or increased and improved during his/her employment.

In short, the employer must demonstrate to the court that the restrictions in the non-compete agreement are reasonable. In deciding whether the non-compete agreement is reasonable, the court will consider the following:

  • whether the restrictions are narrowly tailored to protect only the employer’s legitimate interests;
  • whether the restrictions are reasonably limited in activity, geographic area, and time;
  • whether the employer’s interest is outweighed by hardship to the employee; and
  • whether the restrictions are likely to injure the public.

Although non-compete agreements are subject to a high degree of judicial scrutiny, a court will not necessarily void an agreement that is overbroad in protecting the employer’s interests. Instead, the court, on its own accord, may narrow the agreement (in geography, scope and/or time), thereby protecting the interests of both the employer and the employee. The court’s ability to modify the non-compete agreement is known as the “partial enforcement rule.” This rule is applied when the non-compete agreement is enforceable except as to a specific restriction(s) that is broader than necessary to protect the legitimate interests of the employer.

However, the partial enforcement rule is not applicable under the following circumstances (thereby causing the non-compete agreement to be void in its entirety):

  • if the circumstances surrounding the signing of the non-compete agreement indicate bad faith or overreaching on the part of the employer;
  • if enforcing the non-compete agreement, even if modified, would impose undue hardship on the employee; or
  • if enforcing the non-compete agreement, even if modified, would adversely affect the public interest.

Although Rhode Island courts have not yet expanded on what constitutes bad faith and overreaching in this context, other state courts have held that the timing of the presentation of a non-compete agreement to the employee may bear on the employer’s bad faith. For example, an employee who is presented a non-compete agreement on his/her last day of employment, without prior notice, is at a distinct disadvantage and is in a weak bargaining position, which could suggest overreaching and/or bad faith by the employer.

Of course, there is an inherent imbalance between the bargaining positions of employer and employee, and that imbalance need not be remedied before a non-compete agreement could be deemed reasonable. Nonetheless, like courts in other states, Rhode Island courts would likely weigh the following in deciding whether an unreasonable non-compete should be voided altogether or modified:

  • whether the employer’s general practice with respect to non-compete agreements is fair and designed to protect only its legitimate interests;
  • whether the employer gave the employee a reasonable opportunity to read and understand the agreement;
  • whether the employer allowed (or, if asked, would have allowed) the employee to modify the agreement; and
  • whether the terms of the agreement are so overbroad that they oppress the employee and make the employee fearful of leaving and securing other employment.

To protect your business, it may be necessary to require certain employees to sign non-compete agreements. However, unless such agreements are drafted narrowly to protect only legitimate business interests, they could be modified by a court if employees challenge them. Furthermore, although businesses cannot predict precisely how a court would rule as to the scope of a non-compete agreement, businesses certainly can control the circumstances surrounding the execution of the agreement. Making sure that the agreement is not the product of overreaching or bad faith would reduce the likelihood of a court voiding the agreement in its entirety.

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Adler Pollock & Sheehan

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