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PROFESSIONAL LIABILITY SPOTLIGHT

Tread carefully when using

noncompete agreements

By Stanley D. Sterna, Esq.

onsider this scenario: Your consulting practice with an expanding mobile workforce operating in a
Cconcentrates on serving a niche client industry. global economy, the use of these restrictive covenants
To protect your practice, your firm has included a to prevent this from occurring is being reexamined
noncompete clause in its employment contracts for by the courts and state legislatures.
employees you hire. The clause was drafted several
years ago with the advice of legal counsel and pre- Know your state’s laws when drafting
cludes employees from being in direct competition noncompete agreements
with your firm in any capacity in all states in which A noncompete agreement is a contract between an
you currently do business and for a period of three employer and employee wherein the employee typi-
years. One day a valuable senior manager in your cally agrees not to work for their employer’s competi-
advisory practice section announces she’s leaving tors within a certain geographical region and for a
the firm. It’s a big loss, but it also is compounded by designated amount of time after they leave the firm.
the fact that she’s going to a consulting firm across In recent years, the legal landscape for noncom-
town that directly competes in your niche industry pete agreements has shifted. Increasingly courts and
and actively tries to solicit your clients. You’re state legislatures are pushing back against what they
likewise concerned that she will reveal confidential perceive to be an overuse of restrictive covenants
information regarding your firm’s marketing and in agreements with employees who do not pose a
business planning strategies. You move to enforce competitive risk. Each state has its own laws and
the noncompete language you had with the former rules about whether, when, and to what extent a
employee. You think it’s an ironclad agreement and noncompete agreement is enforceable.
that it will prevent the employee from competing Many states still recognize and enforce various
with you. forms of noncompete agreements. According to New
However, instead of adhering to the terms she York law, for example, a noncompete clause is gener-
agreed to, the former employee sues your firm for ally considered reasonable when (1) it is necessary to
retaliation and moves to enjoin your firm from en- protect the employer’s legitimate interests, (2) does
forcing the noncompete agreement. The court grants not impose an undue hardship on the employee, (3)
the injunction finding the noncompete agreement does not harm the public, and (4) is reasonable in
unreasonable and against public policy and allows time period and geographic scope. Some states, how-
her retaliation suit to proceed. ever, such as California, Montana, North Dakota,
Firms desiring noncompete protections should and Oklahoma, as well as the District of Columbia,
carefully consider how such clauses are handled in ban or severely restrict the use of noncompete
their state and thoughtfully craft and regularly review agreements. Recently, the Biden administration
their agreements to help ensure they stand up to issued an executive order asking the Federal Trade
challenges. Firms also should consider alternatives, Commission to ban or limit such agreements. While
such as nonsolicitation or confidentiality agreements. the order is expected to be challenged by employers,
In a day and age where information such as client it represents the latest push to promote competition
lists is easily transferable via electronic means, and and remove obstacles that are perceived as hindering
increasingly people with access to proprietary data economic growth.
are temporary workers hired for a limited purpose
or project, it is difficult to implement safeguards to Understand the role of noncompete agreements
prevent the dissemination of such information to with independent contractors
direct competitors. For many years, a method used CPA firms performing consulting and other
to restrict access was to require employees to sign nontraditional services often outsource certain tasks
noncompete agreements prohibiting them from on an as-needed basis to contracted workers. While
directly competing after they leave a firm. However, this offers many benefits to a firm, it also presents a

4 | Journal of Accountancy March 2022