So, you are considering whether to require your employees to sign a non-compete agreement. Are they lawful? Can you implement them for current employees, or just new ones? What rules apply? For how long can you restrict the employee from working for a competitor?
There is both good news and bad. The courts in Nebraska will enforce certain kinds of non-competes, but they must be carefully drafted and appropriately limited. In this article we’ll explore some of the most frequently discussed topics concerning non-competes in Nebraska.
There are no statutory provisions defining the rules on non-competes in Nebraska. All of the law comes from court decisions. As a general rule, non-compete agreements will be upheld so long as they meet three requirements:
- The restriction must be reasonable in the sense that it is not injurious to the public. That is to say, the agreement cannot deprive the public of valuable goods and services;
- The restriction must be reasonable in the sense that it is no greater than reasonably necessary to protect the employer in some legitimate business interest; and
- The restriction must be reasonable in the sense that it is not unduly harsh and oppressive on the party against whom it is asserted.
Can I get a non-compete from the seller of a business I want to buy?
Yes. Courts recognize that a purchaser of a business is entitled to protect the “goodwill” they are buying, and are thus more inclined to allow non-compete agreements so long as they are reasonable in limiting the length of time during which the non-compete applies and the geographic area it covers. Keep in mind the courts will only protect from “unfair” competition and will not insulate an employer from ordinary competition.
What sort of restrictions can I put in a non-compete?
The time and geographic restrictions can be no greater than “reasonably necessary” to protect the employer’s legitimate business interest. The protection of confidential information lasts only so long as its useful life. In one case, a 4-5 year restriction in a deferred compensation plan was found to be too long because the employer failed to establish that the useful life of confidential information lasted longer than the 3-year business plan.
Significantly, the protection from unauthorized use of a client base will be limited to those clients with whom the employee actually did business and had personal contact. For example, a 2-year restriction limited to customers with whom the employee actually did business during the last 2 years of his employment has been upheld. In another case, however, a 2-year, 25 mile radius restriction from soliciting all customers was struck down since the employer couldn’t show that the employee actually dealt with every customer.
This is a key distinction in Nebraska. Departing employees cannot be prevented from soliciting your actual customers if they never dealt with those same customers while you employed them. With respect to former customers or prospective customers, this issue remains unclear and has not been expressly decided in Nebraska.
The geographic area covered by a non-compete covenant must be no greater than the area in which the employee worked for the employer. In other words, if the employee’s territory was Nebraska, Iowa, and South Dakota, you may not restrict them from competing “anywhere in the U.S.” or in Kansas, Missouri, Colorado, etc. A Nebraska court has upheld the grant of summary judgment to an employee who worked for a competitor in the same building as his former employer, well within the scope of the geographic proscriptions of his covenant, where there was no showing the former employee solicited customers of this former employer.
If a Nebraska court determines that the non-compete was limited to those customers with whom the employee actually did business, it will then look to see whether the time and geographic ranges are sufficiently limited so as to protect the employer only from unfair competition and not ordinary competition.
The factors the court will take into consideration in determining whether time or geographic restrictions are reasonable include:
- the degree of inequality of bargaining power;
- the risk of loss of customers to employer;
- the extent of each party’s participation in securing and retaining customers;
- the good faith of the employer;
- the existence of sources or general knowledge as to identity of customers;
- the nature and extent of the business position held by the employee;
- the employee’s training, health, education and family needs;
- the current employment conditions in the marketplace;
- the necessity that the employee would have to change his/her residence; and
- the correspondence of the restraint with the need to protecting the legitimate interests of the employer.
Is it a good idea to put a provision in a non-compete that allows the court to modify an agreement it believes is too restrictive?
Don’t bother. Nebraska courts will not modify an overbroad agreement. Rather they will declare it to be void. That’s why it’s important to write a narrowly drafted agreement that restricts an employee only from soliciting those customers with whom that employee actually dealt and for only the time that is truly necessary.
Do I have to pay the employee something extra in order to get them to sign a non-compete?
A non-compete is a form of contract and the law requires that there be “consideration,” i.e., something of value exchanged in order for the contract to be valid. The good news is Nebraska courts have held that continued employment, even if not for a definite period of time, is valid consideration for a non-compete.
If my company’s headquarters is in another state that allows more restrictive provisions than does Nebraska, can I put a provision in the agreement that says the law of a state other than Nebraska will be used to interpret and enforce the non-compete?
It is not all that unusual to include a provision in an agreement that declares the law of Delaware, Texas, or California, for example, will be applied to interpret the agreement. This is what is referred to as a “choice of law” provision. Usually, that is something the parties to the agreement are free to decide. However, with respect to non-competes, Nebraska courts will essentially ignore such a choice of law provision if applying it would be contrary to the “public policy” of the State of Nebraska.
Accordingly, Nebraska law will be applied to the question of the validity and enforceability of non-compete agreements. The Nebraska Supreme Court has disregarded a choice-of-law provision because the chosen state had no contacts with the transaction or the parties, and application of the chosen state’s law would offend a strong public policy in the forum state. If the employee lives and works in Nebraska, chances are Nebraska law will be applied to determine if the non-compete provisions are “reasonable” and enforceable against the employee.
If my company’s non-compete agreement is valid in Nebraska and the employee violates it anyway, can I recover any damages?
As a general rule a person injured as a result of a breach of contract may recover all of his/her damages, so long as they are reasonably certain and might naturally be expected to flow from the breach. The measure of damages is the value of the employer’s business lost, and not the gain to the employee. The injured party must furnish sufficient proof to enable the trier of fact to determine the actual damages. If sufficient evidence is presented that it clearly appears that a loss of profits was suffered, it is proper to let the jury determine what the loss was from the best evidence the nature of the case allows.
A provision in a covenant to allow for the awarding of costs and attorney fees to the prevailing party is void as it is contrary to public policy in Nebraska. Nebraska courts have not yet decided whether a liquidated damages clause precludes injunctive relief to enforce the covenant.
Is there anything else I can do to try and stop a former employee who has signed a non-compete from soliciting my customers?
You may want to consider seeking an injunction to try and stop the former employee from going after your customers. However, in order to get the court to grant an injunction you will have to present evidence to show that if there is a trial you are likely to have your non-compete enforced. You will also need to prove that if the non-compete is not enforced you will suffer an irreparable injury. You must also show the hardships that your ex-employee’s unfair competition would cause you.
Can I prevent a former employee from using or disclosing my confidential and proprietary information?
Maybe. Employers may be able to obtain agreements precluding the use and/or disclosure of confidential information or trade secrets. However that information can only be protected for the period of its useful life. Customer identities do not necessarily constitute a trade secret. This is also true for customer pricing information. In one case, the court granted summary judgment to a former employee where the employer failed to establish that customer pricing information was a trade secret. Calling something “confidential” doesn’t necessarily make it so. You must treat confidential information as truly confidential, limiting its access and taking precautions to protect it from disclosure.
Non-compete agreements can be an effective tool to help an employer protect access to its customer base during the transition between employees who dealt with that customer. However, it is important not to “over-reach” in both terms of time and scope. The more narrowly the agreement is drawn and limited to those actual customers with whom the employee dealt and for the shortest period of time to enable the employer to get a new employee in place is more likely to be acceptable and enforceable. Going overbroad could result in no protection at all!
It’s a good idea to have your non-compete agreements periodically reviewed to help assure they remain enforceable under current law.