Thursday, March 11, 2010
Nationwide Restrictive Covenants In the Information Age (PrecisionIR v. Clepper)
Determining the proper geographic reach of a non-compete restriction is not simply a study in seeing what prior courts have upheld as reasonable. The economy is not what it was twenty years ago. The internet allows businesses in a wide range of fields to conduct work nationally, and even globally, with few barriers to entry. The advent of webconferencing allows salespersons to develop relationships with valued clients far away at low relative cost.
Still, courts almost uniformly examine the notion of non-compete's "reasonableness" with a view towards how far it extends. That usually results in a fact-intensive inquiry as to where an employer conducts sales and cultivates prospects, and where an employee has the ability to influence relationships or capitalize on access to proprietary information. The nationwide non-compete in Information Age-businesses is not only reasonable, but also necessary in many instances.
However, a business that chooses to implement a nationwide non-compete should consider other factors.
First, the time scope of the non-compete should be shorter. It is easier to justify a nationwide covenant if the restriction lasts 6 or 8 months as opposed to 2 years.
Second, a company implementing nationwide non-competes ought to carefully tailor its activity scope so that it prohibits employees from performing a narrowly defined list of tasks substantially similar to what they were doing for the employer. A broad non-compete that limits all types of work for a competitor is less likely to be viewed as reasonable and is at risk for being struck down as an overbroad restraint of trade.
Third, for sales-based employees, a non-compete may not be the best solution; a client non-solicitation covenant is always a good option and, by definition, need not have a geographic restriction.
As a federal district court in New York recently noted, the reasonableness factors - geography, time and activity - need to be analyzed together, and a wider geographic restriction may necessitate a shorter non-compete duration or a more carefully defined activity restraint. Because Information Age businesses seem to have shorter product cycles and go through rapid stages of innovation, it only makes sense to offset a geographically broad covenant with one that is shorter.
Court: United States District Court for the Southern District of New York
Opinion Date: 3/1/10
Cite: PrecisionIR, Inc. v. Clepper, 693 F. Supp. 2d 286 (S.D.N.Y. 2010)