Applicability to Currently Existing Contracts
Over the past several years, a number of states have enacted laws which significantly limit (or altogether ban) an employer’s ability to impose non-compete provisions on employees when their employment terminates. Often, these laws are only applicable to contracts entered into after the law’s effective date. However, the question remains whether amendments to or renewals of contracts entered into prior to the law’s effective date are subject to the non-compete law. If the non-compete provision remains unchanged, but the contract is otherwise amended, does the contract fall within the purview of the law’s non-compete limitations? Similarly, if a contract automatically renews after a certain term, is the contract considered a new contract that is subject to the non-compete law?
For some states, this determination is addressed by the law itself. A number of laws simply provide that any and all non-compete agreements (previously existing and new) are void as of the effective date. In others, the legislature foresaw the issue of amendments and renewals and addressed it within the law. For example, Connecticut, New Hampshire, New Mexico and Utah specifically provide that the non-compete law applies to new contracts, and amendments, extensions and renewals of previously existing contracts – it being the intention that eventually every contract will be subject to the law’s limitations. Other state legislatures, however, did not address the issue within the law, which leaves the determination to the courts in the event of a dispute.
Unfortunately, the courts have not yet addressed this issue. Therefore, an employer’s best chance of having a valid non-compete (in a state that does not ban non-competes altogether) is to draft it in a way that excludes it from the broadest interpretation of the law. Since any amendment to a currently-existing employment agreement could trigger applicability of the non-compete law, employers cannot go back and revise the language of currently existing non-compete agreements to ensure enforceable. That said, if you are in a state that has not yet passed a non-compete prohibition, there may be a way to increase the chances that your non-compete provision would survive the passage of a non-compete law that applies to amended, renewed and extended contracts. In order to avoid having your non-compete become nullified over time, you can set an indefinite term for the agreement such that no renewals or extensions are necessary (i.e., “This Agreement shall be effective as of the Effective Date and shall continue until terminated as set forth in Section ___ below.”). Note however, that this would not address the concerns surrounding amendments and therefore could limit your ability to amend, for example, the compensation under the employment agreement. However, by incorporating increased volume or automatic revisions into the compensation formula (i.e. percentage-based compensation or a base salary that automatically increases by x% each year), you can avoid the need to amend the agreement, thereby risking the application of a non-compete law.
In addition, you may be able to avoid the risk of having your non-compete agreement invalidated if you include the non-compete in a separate agreement entirely. The non-compete agreement can be a condition of employment under the employment agreement, but all terms pertaining to the non-compete should be included in a separately negotiated agreement. By doing this, you can amend, renew or extend the employment agreement without having any impact on the non-compete agreement. The non-compete agreement would reference employment and be in effect during the period of the individual’s employment with the practice, but it would otherwise remain intact despite any revisions to employment. However, if the non-compete is in a separate agreement and expected to remain independent of the employment agreement, it will need to be supported by separate consideration. The practice would need to provide the employee some benefit in exchange for his/her agreement to sign the non-compete agreement. Without such consideration, the non-compete agreement would likely be held invalid.
If you are concerned about your state’s non-compete law, or the possibility that a non-compete law is in your state’s future, contact our firm and we can assist you in drafting your agreement in a way that is most likely to protect your interests under such law.