What is a Non-Compete?
Non-compete agreements, sometimes called non-competition agreements or covenants not to compete, are contractual agreements between an employer and an employee. These agreements prevent the employee from competing with the employer—typically for a specified period of time after the employment relationship ends—by competing with the company for business from existing clients or customers.
The purpose of non-compete agreements is to protect employers. A business and its clients or customers spend time and money establishing the business relationship; the business doesn’t want to lose its advantage if one of its employees or independent contractors starts a new company and takes its clients with them. A non-competition agreement aims to keep employees from revealing confidential information about the employer’s business or using that knowledge to the employer’s detriment after the employment ends.
Because they prevent competition , non-compete agreements have evolved from nothing more than a "gentleman’s handshake" in colonial days to full-blown contracts with terms and conditions. The purpose of the agreement is to prevent an employee who has information about the company from going into competition with the company and taking business away. Non-compete agreements can be effective if they aren’t overly broad and don’t limit the former employer’s ability to run its business.
The Enforceability of Non-Compete Agreements in Nebraska
In Nebraska, non-compete agreements are enforceable only if they are reasonable with respect to duration and geographic area. Non-compete agreements must be signed by the employee in order to be enforceable. Furthermore, the employer must provide the employee with "a benefit" on which the agreement may be conditioned. The wording of many older Nebraska cases indicates that the "benefit" is consideration that is separate and apart from the at-will relationship of the employer and employee. As more recent cases make clear, this is not the case. The consideration provided — such as employment itself — is sufficient for non-compete agreements in Nebraska. In order for a non-compete agreement to be enforceable, it must serve in some manner to protect legitimate business interests by protecting confidential information or preventing unfair competition. Courts will also consider the hardships imposed by the non-compete on the employee and the potential harm to the employer. While the factors relevant to drawing the lines of enforceability on non-compete agreements are difficult to discern, Nebraska courts favor giving great latitude to the employer in enforcing an agreement.
Essential Features of an Enforceable Non-Compete
The key elements of a valid non-compete agreement include an appropriate time duration, a reasonable geographic scope, and a legitimate protectable business interest.
As mentioned in previous posts, non-compete agreements in Nebraska are disfavored because they interfere with the employees’ ability to earn a living. But where a legitimate business interest of the employer is at stake, the courts will enforce non-competition provisions that are reasonable in nature. The essential elements of a legally enforceable non-compete are: (1) a time duration; (2) a geographic scope; and (3) a legitimate protectable business interest.
For example, a non-compete provision prohibiting a former employee for one year from providing services to any client, prospect, referral or customer of the employer that "the Company has sold to, calls on, or is attempting to sell to over the period of the year prior to [the employee’s] last day of employment" was deemed too broad and, therefore, unenforceable. Where the interests of the employer and employees collide, Nebraska courts generally favor the employees and will not be hesitant to find no enforceability of such provisions.
Therefore, although specific jurisdictions may vary in their respective tests for reasonableness, the majority of jurisdictions that have addressed the issue require that a non-compete provision be supported by adequate independent consideration and be reasonable as to duration, geographic extent and scope and should be narrowly tailored to achieve its intended purpose.
Common Issues with Non-Compete Agreement Enforcement
A typical challenge employers face when attempting to enforce their non-compete agreements is that Nebraska judges will "blue pencil" the agreement if they find portions of the agreement are unreasonable and thus unenforceable. A common example is when they find the time or geographic restriction is unreasonable. More typically, the judge will find a portion of the agreement to not be enforceable, which will allow the judge to "blue pencil" the agreement, but will nevertheless enforce other reasonable aspects of the agreement, such as the nondisclosure of confidential information or the nonsolicitation of customers.
Employers must have very tight, specific language in their covenants to compete in order to avoid common challenges when enforcing these agreements. Additionally, you can increase your chances of getting the agreement enforced by taking the right steps at the front end with your employee.
Another challenge in Nebraska is the fact that if you do not have a written agreement that is signed by the employee, any non-compete provision will be considered to last 10 years from the date of termination of the employment instead of being just a reasonable timeframe. The Nebraska Supreme Court made this ruling last year.
Occasionally, employers challenge when their current employee will actually quit and breach the noncompete agreement. In other words, they want to know when the employee quit. Some employers will wait until the employee actually quits, and then challenge the enforceability of the agreement because the agreement itself did not say that it is effective upon termination of employment. Those employers lose the challenge altogether and the courts hold the agreement is effective upon termination, meaning the time limitations of the noncompete and customer non-solicit clauses are effective immediately after termination.
Non-Compete Agreement Alternatives
While this post is focused on what Nebraska law allows, it may sometimes be more helpful to understand possible alternatives that entities have to non-compete agreements that are deemed too broad or otherwise difficult to enforce. Although some employers require general confidentiality agreements in addition to written non-competition covenants, many states outside of Nebraska have increasingly scrutinized stagnant confidentiality agreements with regard to employee information. As a result, many businesses might find that they need additional covenants to protect their legitimate interests if the scope of the non-competes is found untenable. Some of the potential options can include:
Restrictive Employment Covenants – Instead of a non-competition covenant, some may use an alternative restrictive employment covenant to address activities that are similar to those routinely addressed by non-competition agreements. These types of covenants prioritize customer and production lists or other confidential information that derives value from its confidentiality.
Client Solicitation Prohibition – A non-solicitation agreement, particularly for customers, might serve some of the same purposes as a non-competition covenant . While this type of agreement may be less likely to be considered an unreasonable restraint on trade as compared with a non-competition covenant, it nonetheless can be found to unreasonably restrict trade, especially with regard to time and geography.
Assignment of Inventions and Ideas – Employers can also use an invention assignment agreement. An invention assignment for patent rights allows an employer to own any post-employment inventions conceived during employment or within a limited amount of time thereafter. Likewise, an idea assignment agreement generally allows the employer to own any employment-related ideas suggested during employment, or within a limited time after termination.
Confidentiality Covenant – An additional alternative is a restrictive confidentiality covenant. Most courts consider confidentiality covenants justified where they limit disclosure of trade secrets. Companies without trade secrets might nonetheless use other protective provisions to justify a confidentiality covenant, including protection of customer information and other largely intangible forms of confidential information. Even if this type of covenant is deemed reasonably necessary to justify the protection of confidential information, however, a company will likely need to prove the existence of that confidential information to justify its restriction.
Citations on Non-Competes in Nebraska
Nebraska case law is relatively clear regarding the enforceability of non-compete and restrictive covenants. In 2009, the Nebraska Supreme Court in the case of Hugh Murray Co. v. Shumaker, 275 Neb. 464 (2008) held that the following key factors are identified to determine whether a restraint is reasonable on its face: (1) the types of activities that are restrained (which must be limited). (2) the duration of the restraint (which must be reasonable). (3) the geographic area covered by the restraint (which must be reasonable and not impose an undue burden on the employee). (4) consideration (which must be supported by a valuable consideration and not merely the existence of an employment relationship). And (5) connection with employer’s interest (the restraint must bear some connection to the interests of the employer that it is designed to protect). Emphasis added. As a result, Nebraska statute does require a reasonable time limit for a non-competition provision in a contract.
Advice for Employers and Employees
The above provisions present some important advice to employees who are asked to sign non-competition agreements. Most importantly, we think employees should consider not signing the agreement. Or, at a minimum, limiting restrictions by renegotiations or with specific exceptions. The Supreme Court of Nebraska has both asked that employees not sign agreements that appear overly broad and to examine such agreements carefully. See, e.g., Gillman v. Mission W. Fin. Servs., 274 Neb. 806, 811, 743 N.W.2d 497, 500 (2008) ("We feel it is our duty to advise employees who are, or may be, asked to sign covenants not to compete that they should not do so absent a thorough examination of the entire agreement and those provisions which remove their right to work and compete in the future." Sioux BioMed, Inc. v. Schomaker, 292 Neb. 778, 793 N.W.2d 1, 7 (2010) ("[] absent some sort of threat or coercion, we do not condone an employer’s effort to compel its employee to relinquish his or her right to work in the future . ")
And, despite the rules set forth in this series of posts, we would prefer that for employees who do sign a non-competition agreement that such agreements be more limited in scope to the extent that it is reasonable to do so. In other words, where there is an application request, we would strongly encourage the employee to request that the employer remove the activities, customers, geographic area, and time period from the proposed non-competition agreement that is not necessary to protect the employer’s legitimate business interests.
For an employer who wishes to create or enforce a non-competition agreement in Nebraska, they should consider the following: In the end, for both employers and employees, the above are just suggestions. Unless there are a conservative group of justices on the Nebraska Supreme Court who are sympathetic to the plight of employees, such opportunities can be rare.