Do Non-Competes Help or Hinder the Growth of Business?

With the increasing use of non-competes across the business spectrum, a debate is starting to rage in state legislatures and in business forums about whether the prevalence of such agreements helps or hinders economic growth.  The proponents say that the agreements are necessary to protect successful businesses from being harmed by unscrupulous employees and these agreements actually encourage employers to involve more employees in the inner workings and strategic decisions of a company (since, the argument goes, employers are more comfortable that key information won’t be used to compete against them).   Detractors, on the other hand, say that non-competes chill entrepreneurship.  An interesting four-minute version of the debate was recently aired on Fox Business.  Even the entrepreneurs concede, however, that trade secrets and confidential business information should always be protectable.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Concerns Over Economic Growth Leads Some States to Limit Non-Compete Agreements

The Wall Street Journal recently reported a more than 60% rise in non-compete litigation over the past decade.[1]  The article notes that while non-compete agreements were once largely aimed at top executives, they are now “’reaching wider and deeper within organizations’ to include sales representatives, engineers and people involved in research and innovation.”

The article observes that though non-compete agreements allow employers to protect valuable assets and significant investments in their workforce, such agreements also have a chilling effect.  The threat of litigation makes it less likely that employees will change jobs, start their own businesses or join a startup or small firm.

According to Alan Hyde, a professor at Rutgers University School of Law, “while employers may benefit from enforcing the agreements, there is little evidence of any social or economic advantage:  ‘You have slower growth, fewer startups, fewer patents and the loss of brains to jurisdictions that don’t enforce the agreements.’”  For many startups, non-compete agreements often limit the recruiting process due to the potential cost of litigation and the expense of paying a non-productive employee until the agreement expires.

Olav Sorenson, a Yale University management professor, found non-compete agreements appeared to impede innovation.  States that did not enforce non-compete agreements saw more venture capital on the formation of startups, biotech spinoffs and job growth.

As result of the negative economic impact, some states have enacted or are considering laws which limit non-compete agreements.  For example, California voids many non-compete agreements.  New Hampshire voids non-compete agreements which are not provided before or when a job offer is made, or when the current job position changes.  Massachusetts is set to hold hearings on a bill that would limit non-compete agreements to six months.  And New Jersey and Minnesota have introduced legislation that would limit or void non-compete agreements.

Georgia, on the other hand, recently went the other way by enacting legislation in 2011 (OCGA §13-8-50, et seq.) that actually made it easier for employers to enforce non-compete legislation.  The findings of the Georgia legislature run counter to the conclusions of the experts quoted in the WSJ article – the lawmakers determined that Georgia’s prior body of law that greatly favored employees actually impeded efforts to attract new businesses to the state and retain existing ones.

Though Tennessee has not enacted legislation limiting non-compete agreements for economic reasons, the economic impact influences the balance between the need to protect an employer’s legitimate business interest and the desire for free trade.  In Tennessee, the restrictions of a non-compete agreement must be no greater than is necessary to protect the employer’s business interests.  If the restrictions are too great, a court can void or rewrite the agreement.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.


[1] Ruth Simon and Angus Loten, Litigation Over Noncompete Clauses is Rising, Wall St. J., Aug. 15, 2013, at B1.

Be Wary of Illinois Choice of Law Provisions in Non-Compete Agreements

Although this blog focuses on non-compete law in the Southeastern states, we often run into Chicago-based clients whose form non-compete agreements contain provisions requiring the contracts to be construed under Illinois law, even though the employees bound by the agreements are located in the Southeast.  A recent Illinois appellate decision, however, should make employers and practitioners think twice before voluntarily invoking Illinois law on non-competes.

In Fifield and Enterprise Financial Group, Inc. v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, 2013 Ill. App. LEXIS 424 (June 24, 2013), the Illinois Appellate Court, First Division, held that non-solicitation and non-competition covenants were unenforceable where the employee resigned after being employed for slightly longer than three months.  The Court found that the restrictive covenants in the employee’s agreement were not supported by adequate consideration, and therefore could not be enforced, because “Illinois courts have repeatedly held that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant.” Id., at *14.  It appears that the only way around this two-year requirement under Illinois law is to have separate, adequate consideration for the non-compete covenants, such as a promise of guaranteed employment for a specified term or an adequate payment solely for the covenants.

In contrast, Georgia courts have long held that merely the promise of new or continued at-will employment is sufficient consideration for a non-compete agreement, with no requirement for a minimum duration of employment before the non-compete will be enforceable.  See Breed v. Nat. Credit Assn., 211 Ga. 629, 631-33, 88 S.E.2d 15 (1955).

BURR POINT:  Employers in the Southeast should consult with an attorney well-versed in non-compete law to ensure that the choice-of-law provisions in their employment agreements are not unnecessarily reducing the chances of having the non-compete provisions enforced, especially if their agreements have Illinois law as controlling.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.