Businesses often attempt to protect their valuable, non-public information – for example, confidential business and marketing plans developed through investment and research – from being used by their competitors by requiring employees to sign what is generally referred to as a non-compete agreement. As we addressed in a prior post, whether a non-compete agreement provision will be enforceable in the eyes of a court is a crucial consideration when a business enters into this type of employment agreement.
A court does not scrutinize all contracts to the same degree. When a business agrees to sell 10 widgets to a customer in exchange for payment of $10, a court will not scrutinize that agreement to determine whether it is fair or reasonable – it will simply enforce it in accordance with the plain meaning of its terms. Our free market economy relies on this freedom of contract. Non-compete provisions, however, are notably different. In most instances, the enforcement of a non-compete provision will restrain a person’s ability to make a living in the field of his or her choosing, and courts have decided to take a closer look at such provisions to make sure a business has a good and valid reason to restrain its employee.
The use of the term “non-compete” actually encompasses a range of contractual provisions that restrict employees’ and former employees’ actions. In Rhode Island, the specific type of restraint on an employee’s actions can directly impact the likelihood that a court would enforce the provision. The traditional type of non-compete provision wholly prohibits an employee from working for a competitor in a given geographic location and for a given period of time – for example, a one-year prohibition on working for a competitor located in the New England states. However, another type of restraint on an employee’s actions is a non-solicitation provision, which prohibits an employee from soliciting the employer’s existing and/or prospective customers (and sometimes the employer’s employees). Thus, a non-solicitation provision would prohibit the employee from soliciting business from the employer’s (or former employer’s) customers by, for example, contacting them and attempting to sell them products or services. This is a more narrow restraint on the employee than the traditional non-compete provision, as it does not necessarily prohibit the employee from working for a competitor.
The distinctions between the two types of provisions are more than just the nature of the limitation. The Rhode Island Supreme Court has held that a non-solicitation provision is enforceable in only two, limited circumstances:
• if the customers being solicited are confidential in nature; or
• if a “special relationship” exists between the business and the customer being solicited.
Durapin, Inc. v. American Prods., Inc., 559 A.2d 1051, 1057 (R.I. 1989). In the absence of one of these two specific circumstances, a non-solicitation provision would lack the requisite “protectable interest” and, therefore, the provision would be an unenforceable restraint on the employee’s right to earn a living. In contrast, no Rhode Island court has so narrowly defined the scope of a protectable interest in relation to a traditional non-compete provision. Thus, in Rhode Island, it is arguably harder for a business to demonstrate a protectable interest supporting a non-solicitation provision (and therefore to enforce such a provision), even though a non-solicitation provision arguably imposes less of a restraint on the employee’s future employment activity.
Valid and important reasons exist for businesses to utilize both types of provisions, either in isolation or in conjunction with one another. Navigating these issues successfully – long before an employee has left for a competitor and a court is scrutinizing the employment agreement – requires an in-depth understanding of both the business’ confidential information and this intricate area of the law.