Non Compete Agreements and Employer Goodwill
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A non compete agreement in Massachusetts will only be enforced if it serves a legitimate interest of the employer. This is true whether you signed your agreement before or after the new non compete law took effect on October 1 2018.
Simply wanting to prevent a former employee from competing is not a legitimate business interest. A non compete must protect either the employer's trade secrets, confidential information, or goodwill. Below is some information about what goodwill means in the context of a non compete agreement, when goodwill might belong to the employee, not the employer, and some special circumstances. |
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What Is a Employer Goodwill to Support a Non Compete
Goodwill generally is the reputation or brand identification enjoyed by a business. In the employment context, the goodwill of the employer and that of the employee can become intermingled.
Imagine for example a sales representative who calls on a group of customers for years and years as an employee. That individual has a personal reputation with the customers, but is also closely associated with the company and the company's reputation. When he or she leaves for a competing position, the customers may associate their positive impressions of the company with that individual.
This is primarily what businesses are seeking to protect when they have a customer facing employee sign a restrictive covenant. They do not want the person who has been the face of their company suddenly turning up as the face of the competition.
Imagine for example a sales representative who calls on a group of customers for years and years as an employee. That individual has a personal reputation with the customers, but is also closely associated with the company and the company's reputation. When he or she leaves for a competing position, the customers may associate their positive impressions of the company with that individual.
This is primarily what businesses are seeking to protect when they have a customer facing employee sign a restrictive covenant. They do not want the person who has been the face of their company suddenly turning up as the face of the competition.
When Does Goodwill Belong to the Employee
It is easy to make the case for employer goodwill when a salesperson is hired to call on existing accounts, or to promote the company to new prospects. All of this work is done under the company's name and with the benefit of the company's reputation.
It becomes a little more complex when the employee brings the customers or prospects with them to the job. This can happen in the context of professional services, or services like insurance that renew annually. An employee may bring a "book of business" to the new employer and work those customers along with the company's existing customers and prospects.
In that situation, the employee may have an argument that the company has no legitimate interest in the goodwill that existed before the employment relationship even began. If they can prove that they are only trading on these preexisting relationships, a court may refuse to enforce the non compete.
It becomes a little more complex when the employee brings the customers or prospects with them to the job. This can happen in the context of professional services, or services like insurance that renew annually. An employee may bring a "book of business" to the new employer and work those customers along with the company's existing customers and prospects.
In that situation, the employee may have an argument that the company has no legitimate interest in the goodwill that existed before the employment relationship even began. If they can prove that they are only trading on these preexisting relationships, a court may refuse to enforce the non compete.
Non Compete Reasonable Scope and Duration to Protect Employer Goodwill
A non compete must always be reasonable in geographic scope and duration. What is reasonable depends on the nature of the interest the employer is trying to protect.
Under the new Massachusetts non compete law, the time period is capped at 12 months. Depending on the circumstances even 12 months may be too long. The time period must be connected to the interest the employer is seeking to protect.
For example, 12 months may be the right amount of time for someone who sells a product or service that renews annually. A restriction of one year would protect the business from the employee trading on its good will through each customer's next annual renewal.
In a business with a shorter sales cycle, a full year might be more than is reasonably necessary to protect the employer's interest. Examples might include hair salons where most customers visit monthly, or businesses that order supplies weekly or monthly. The employee could argue that a restriction is only necessary for a few of those sales cycles to protect the employer goodwill.
The geographic area also must match the interest in goodwill. In the case of a sales person who covers a nationwide territory, a nationwide restriction might be reasonable. In the case of a hair salon where most customers come from a 10 mile radius, a 25 mile radius might be unreasonable.
Under the new Massachusetts non compete law, the time period is capped at 12 months. Depending on the circumstances even 12 months may be too long. The time period must be connected to the interest the employer is seeking to protect.
For example, 12 months may be the right amount of time for someone who sells a product or service that renews annually. A restriction of one year would protect the business from the employee trading on its good will through each customer's next annual renewal.
In a business with a shorter sales cycle, a full year might be more than is reasonably necessary to protect the employer's interest. Examples might include hair salons where most customers visit monthly, or businesses that order supplies weekly or monthly. The employee could argue that a restriction is only necessary for a few of those sales cycles to protect the employer goodwill.
The geographic area also must match the interest in goodwill. In the case of a sales person who covers a nationwide territory, a nationwide restriction might be reasonable. In the case of a hair salon where most customers come from a 10 mile radius, a 25 mile radius might be unreasonable.
Non Competes, Employer Goodwill and Independent Contractors
State law allows enforcement of non competes against independent contractors. However, the nature of the relationship makes the goodwill argument more complicated.
An independent contractor by definition operates independently from the company and is free to offer services to others. An independent contractor is also supposed to be performing services outside of the core business of the employer.
If the independent contractor in fact meets all of these requirements, it may be more difficult to show that he or she controls any employer goodwill. If they are calling on customers and prospects, they very likely are serving a core business function of the employer and may be mis-classified. If they are not, they may have no affect on employer goodwill one way or another.
An independent contractor by definition operates independently from the company and is free to offer services to others. An independent contractor is also supposed to be performing services outside of the core business of the employer.
If the independent contractor in fact meets all of these requirements, it may be more difficult to show that he or she controls any employer goodwill. If they are calling on customers and prospects, they very likely are serving a core business function of the employer and may be mis-classified. If they are not, they may have no affect on employer goodwill one way or another.
References to Goodwill in the Employment Agreement
Often non competition agreements will attempt to document the employee's access to goodwill. You may see language stating that you agree that you have access to trade secrets, confidential information or employer goodwill.
The reality is that courts will decide for themselves whether there is a legitimate interest protected by the non compete. This will be based on the specific facts at issue, not boilerplate language in the employment agreement.
The reality is that courts will decide for themselves whether there is a legitimate interest protected by the non compete. This will be based on the specific facts at issue, not boilerplate language in the employment agreement.
How Our Non Compete Lawyers Can Help
We can help review your non compete agreement and the facts of your situation to help assess whether it can be enforced against you. You can use the button below to schedule a call back from a member of our team, or give us a call at 781-784-2322.
