One Size Does Not Fit All

March 1st, 2013 by JBWK

Employment contracts and non-compete agreements are now standard fare in many professions. They certainly serve a good business purpose, but a misguided or poorly drafted agreement can cause headaches down the line.

In a recent Forbes column, employment lawyer Richard Tuschman raised a great question: Should you try to draft a non-compete agreement enforceable in multiple states? His short answer: You can try, but you may not succeed.

noncompete

State law (as opposed to federal law) governs non-compete agreements. That makes things interesting with businesses operating around the entire country (and world). And, because of the unique public policy concerns about restrictions on employees earning a living, state law varies wildly on this issue.

For example, Virginia will only enforce non-competes that are narrowly tailored to protect a valid business interest. It looks at three key criteria:

  1. The geographic scope of the restriction
  2. The time period of the restriction
  3. The functions the employee is restricted from performing

If the non-compete is too broad, Virginia courts will strike it completely. As keen observers know, Virginia courts typically won’t “blue pencil” the agreement, or rewrite the terms to make the agreement enforceable. 

However, some states will blue pencil non-compete agreements. Some, like California, will only enforce them if they’re in connection with a business sale. Some states have loose rules on enforceability, while others have strict ones.

The obvious solution is to include a provision that a particular state’s law will apply, and that litigation can only take place in that state. But this may be more troublesome than it appears. For example, if a Virginia employee is asked to sign a non-compete governed by Oregon law with all litigation taking place in Oregon, and the employee has never lived in, worked in, or visited Oregon, a Virginia court may be reluctant to enforce that “choice-of-law” clause. Likewise, an Oregon court might not have jurisidiction over the employee to force the employee to defend litigation filed there under the “venue” provision.

It’s probably a wise idea to include a choice-of-law provision and venue provision in any event, especially where there are valid ties to the state whose law you’re trying to enforce. But be aware that problems might pop up when dealing with employees in other states, and things may not be quite as simple as you would like.

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