Noncompetition Agreements Can Be Thorny

To sign or not to sign? Are noncompetes worth the fuss?

Many Oregon employers require employees to sign noncompetition agreements. When the employee departs, the employer uses the agreement to prohibit the employee from competing against the employer. These agreements might prohibit conducting business with the employer's customers, recruiting employees away from the employer, or engaging in competitive business in a geographic region. It sounds so simple, but rarely is.

Noncompetition agreements are disfavored by Oregon courts, but they have long been upheld in court challenges. Early cases uphold the rights of physicians to enforce such agreements against doctors who join a practice, and then depart with a fistful of patients. Businesses have successfully enforced noncompetition agreements against sales representatives, product developers and executives. In the mid-1970s, the Oregon Legislature considered abolishing noncompetition agreements, but instead gave in to business interests and enacted a unique statute addressing minimum requirements of an effective noncompetition agreement. That statute, ORS 653.295, voids any noncompetition agreement that is not entered into when the employee starts work, or upon "bona fide" advancement.*

But the statute's requirements are just the tip of the iceberg. Noncompetition agreements must also be reasonable in duration. They must be limited to customers or territories where the business operates. They must be designed to protect a legitimate interest, such as trade secrets or customer relationships. They cannot be used merely to protect skills and experience gained on the job.

An employer who fails to tailor a noncompetition agreement to its legitimate needs may be left holding a worthless document. Courts may throw out agreements without temporal limits, or those with geographical limitations exceeding the employer's business reach. One recent decision from our federal district court explained that it would be better jurisprudence for judges to discard rather than narrow overbroad agreements -- otherwise employers purposely would make them overbroad. Other courts have been willing to impose reasonable restrictions where the agreement is silent as to a geographic area or the duration of the restriction if the agreement was made in good faith.

Even well-designed noncompetition agreements are wasted unless employers establish and carry out a consistent policy for obtaining signed noncompetition agreements from new employees. Pre-hire offer letters should specifically state that the job is subject to the employee agreeing to a noncompetition agreement. The agreement itself should be presented and signed on or before the employee starts work or is given a genuine promotion -- including increases in pay, status and responsibility -- and should be dated by the employee or date-stamped with a reliable device. Courts will be circumspect of back-dated agreements. Candid discussions accompanying the presentation of the agreement, and careful reminders upon separation are the best ways for employers to avoid expensive enforcement lawsuits.

Noncompetition agreements should be kept in a safe place. It is not enough to merely place the agreements in individual personnel files, especially if employees can get unsupervised access to those files. Diligent employers will preserve copies in secure files or in electronic media. In one case, the employer lost the noncompetition agreement for a departing longtime sales employee, and no one was quite sure whether she had ever signed one. When the employee and her potential new employer inquired, the former employer reported that it had no noncompetition agreement. The employee then accepted work with the competitor. When the agreement surfaced months later, the court held that the employer could not enforce it because the employee and his new employer had relied on what they had been told.

Employees often mistakenly think that noncompetition agreements cannot be enforced, or that they only apply if the employee quits. These myths may have crept north from California, where noncompetition agreements are not ordinarily permitted. Employees who are asked to sign noncompetition agreements should consider them carefully before signing. Even those who join a company with their own books of business may have to forfeit their pre-existing customer bases when they later leave. A noncompetition agreement can feel like a prison sentence to an employee who wants to leave the job.

Many businesses succeed without contractually restricting the competitive conduct of departing employees. Successful companies build customer loyalty by offering unique products and services. They maintain relationships when an employee departs because relationships are assigned to more than one employee. These companies keep turnover low by compensating their employees well, and treating them fairly and consistently. Some employers believe they can recruit better talent by not requiring noncompetition agreements. If the employee leaves for a competitor, a potted plant and a warm note wishing good luck may keep the former employee from targeting his former company's customer base.

Noncompetition agreements do not suit all businesses or management philosophies. For Oregon employers who want them, they will find receptive courts so long as the noncompetition agreement is well-conceived, properly executed and uniformly enforced. Employers and employees are well-advised to consult an experienced Oregon lawyer before leaping into noncompetition agreements. Of course, don't expect that lawyer to be a party to a noncompetition agreement. Ethical rules governing lawyers do not allow them.

This guest column was published in the Portland Business Journal on August 12, 2005.


* Update: Starting January 2008, employees must be alerted of the noncompetition requirement two weeks before hire. In his monthly column, Ask the Business & Employment Lawyer, Jeff Edelson explains the considerable changes made to Oregon's noncompetition agreement laws by the Oregon Legislature in June 2007, and offers recommendations for employers. For a comprehensive analysis of the new laws effective January 1, 2008, click here to read "Misguided New Law Muddles Noncompete Agreements."