Covenants Not to Compete: Protecting the Legitimate Business Interest of the Employer in an Employment Relationship

Through closely scrutinized, Massachusetts courts enforce non-Compete covenants to protect legitimate interests of employer if not too burdensome on employee.

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By Robert A. Adelson, Esq.

General Rule:

During employment, officers, directors and senior employees owe a fiduciary duty  to protect the interest of the company they serve.  All employees must maintain secrets material to a  business,  and no employee may steal customers or assets while still employed by a  company.  After employment ends, an employee is generally free to compete. Although post-employment competition restraints are “scrutinized  carefully”, courts in Massachusetts (as in many other states) uphold such agreements to the extent they protect legitimate interest of  the employer, do not impose an unreasonable burden on the employee, and are not injurious  to the public.  Courts may also act to limit duration or scope of agreements if unreasonable.

1.         What is an Employee Non-compete?

Non-compete in the Galaxy of Employee Restrictive Covenants

1.1       NDAs /Confidentiality

• Non-Disclosure / Non-Use

• Trade Secrets

• Proprietary Information

1.2       Assignment of Inventions

• “Work for Hire”

• Assignment of IP Rights

• Cooperation

1.3       Non-Solicitations

• Customers / Suppliers

• Prospects

• Co-workers

1.4       Employment restrictions

• Not to work for competitor

• Not to do competing work

• Defining Competing work/ companies

2.         How Restrictive is it?

Coverage and Scope of Employee Non-compete Agreements

2.1       Duration – during / after employment

2.2       Field of coverage – employer business

2.3       Field of coverage – employee activity

2.4       Geography

2.5       Exceptions

3.         Whose ox is gored here?

Stakes and Interests in Non-compete for different Parties

3.1       Employer Interest – training, access, secrets, corp. opportunities/ “good will”

3.2       Employee Interest – prior knowledge, contacts, reputation

3.3       Public Policies involved – Employee freedom vs. Employer proprietary rights

4.         When did it happen?

Effect of Timing when Non-compete arises in Employment relationship

4.1       At Hiring – employee reliance in accepting position

4.2       Mid-Term / at promotion

4.3       On Termination

5.         What kind of Work?

Effect of Type of Employment relationship

5.1       Full-time /  Part-time

5.2       Consulting / Independent Contractor

5.3       How long was employee on the job

6.         Show me the money!

Effect of Cash and Non-cash Considerations paid for Non-compete

6.1       Signing Bonus

6.2       Cash Bonus, Stock or Options

6.3       Severance Pay

6.4       Return or loss of Benefits

7.         Where’s it say that?

Documentation to effect Employment Non-competes

7.1       Employee Offer Letter/ Term Sheet

7.2       Employment Agreement;  Consulting or Service Agreement

7.3       Separate Non-disclosure /Proprietary Inventions/ Non-compete agreement

7.4       Trade secret/No conflict and other company policies – follow through

7.5       Exit Interview; severance, termination or separation agreement

7.6       No Documentation / operation of law

7.8       Severability of Terms/ Judicial Blue Pencil

7.9       Varied Enforcement by Jurisdiction

8.         Is there more than a job going on here?

Effect of Non-competes arising from Employment AND the Sale of business,

Investment in a business, and other Non-employment Motivations

8.1       Founder’s Employment

8.2       Retention Covenants

8.3       Other Hybrid Covenants

RAA156:\lorman.outline

R.Adelson – 8/14/98

____________________________________________

**  This outline was for the presentation by Attorney Robert Adelson as part of a 4-hour seminar course for attorneys, accountants and other professionals, for continuing professional education credit, sponsored by Lorman Educational Services.

Questions on this presentation or the subjects covered,  including any questions byemployees or  executives regarding non-compete, non-solicitation or other restrictive covenants or other issues of employment or employment termination, may be directed to the author and speaker at his current law firm, as follows:

Robert A. Adelson, Esq.
Engel & Schultz, LLP
265 Franklin Street, Suite 1801
Boston, MA 02110
Tel:  (617) 951-9980 ext 205
E-mail:  radelson@engelschultz.com

Author: radelson

Robert Adelson has been a corporate and tax attorney since 1977. He began as an associate at nationally prominent New York City “mega” law firms, first at the Wall Street firm Dewey Ballantine Bushby Palmer & Wood and later at the Park Avenue firm Weil Gotshal & Manges. In 1985, Adelson returned home, where he has since established himself as a respected Boston business attorney. He has attained partner at several small and midsize Boston law firms, most recently at Lawson & Weitzen LLP and then Zimble Brettler LLP, where he was a partner from 1994 to 2004 before becoming a partner at Engel & Schultz LLP.

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