Resolving Noncompete Disputes: Out-of-Court Solutions and What They Cost

Noncompete agreements are a way for employers to protect their clients and trade secrets. Should a current employee seek employment elsewhere, the noncompete may dictate how long they must wait before joining a competitor, the minimum distance from their current workplace where they can work, and even the type of role they can accept. These provisions can lead to many legal disputes.

“As a new hire, you get a stack of benefits documents, sign-up sheets, applications, and sometimes the noncompete is tucked in there,” says Boston-based employment and business litigator Stephen B. Reed.

Typically, the employee signs and doesn’t give it a second thought until the time comes when they’d like to seek employment elsewhere.

“When you sign the noncompete, you really don’t have a lot of bargaining power,” says employment attorney Emily Smith-Lee. “You sign it because it’s, ‘Do you want the job or do you not want the job?’ So issues arise typically long after it was signed, and the employee is looking for work or has a new offer.”

Analyze the Noncompete Agreement Before Signing

“Employees have to start thinking about their legal restrictions, obligations, and limitations from the moment a noncompete is put in front of them,” says Reed.

When an employee emails Reed a copy of a noncompete ahead of signing, he tries to explain what it means for their work and gives his best opinion on whether or not it’s enforceable. As with most things, catching it early is key.

“The number of people who don’t understand noncompetes or appreciate what they mean is surprising,” he adds.

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When Is a Noncompete Agreement Enforceable?

Whether a noncompete is enforceable — meaning protective of the employer’s interests — depends on its wording and if the terms are “reasonable.” It’s in the determination of what is reasonable that things can get sticky. As Smith-Lee puts it, “The law is about as clear as mud.”

It depends on the case, the employer, the contract, and the judge. “It’s fact-specific, so if I’m a hairdresser and my clients come from a two-mile radius, even a 15-mile noncompete may be excessive,” she says. “If I’m a salesperson for IBM who travels all over the country, a nationwide scope might be OK.

“The real difference-maker is whether the thing the employee is going to do has any risk of bringing them in contact with the people or customers from the prior job, or if that thing will in any way use the expertise or knowledge of that previous employer’s trade secrets.”

The classic example both Smith-Lee and Reed mentioned was a technician from Coca-Cola going to work at Pepsi. Even if they don’t have the secret formula in their pocket, there’s proprietary information at play. “But if you are a back-office worker for a company where you don’t deal with their clients or see how the product is made, it’s hard to argue there’s something they could do for a competitor that would implicate them,” Smith-Lee adds.

How Noncompete Disputes Get Resolved

If you’re looking to work in a completely different industry or different scope, you should be fine. Smith-Lee suggests asking yourself two questions:

1. Are you likely to deal with your former customers?
2. Are you likely to use your knowledge of your former employer’s methodologies?

“If the answer to either of those is ‘yes,’ you may have a problem,” she says.

Getting an Out-of-Court Resolution to Your Noncompete Dispute

The most common outcome of these disputes is an out-of-court resolution “through creative solutions where all sides can go forward,” Reed says. These are often a win for all, since it avoids the costs of litigation and everyone gets something they want. Sometimes all it takes is everyone sitting down at a table and hashing it out, so long as all parties are willing to be flexible.

“For the old employer, it may be better to have an agreement with everyone to stay away from some key accounts than to risk the court saying, ‘No, Billy can do whatever he wants,’” Smith-Lee says. “You can negotiate anything, assuming the old employer is truly worried about something. If they’re just being vindictive, then all bets are off.”

“It’s hard to know what an employer’s philosophy is when it comes to enforcing,” Reed agrees. “Some will slap the noncompete on everybody, but never have the intent of enforcing it. They use it as a tool to keep people from leaving. Others will not hesitate to run into court the second someone walks out the door.”

Even worse, the old employer may threaten to sue the new one, Smith-Lee says, leading to a withdrawn job offer.

Calculating the Cost of a Noncompete Dispute

The attorneys estimate that the average noncompete dispute is resolved in a month or two and takes about 40 hours of a lawyer’s time. At a billing rate of $300 per hour, that would be $12,000.

Litigation is another story. “These cases, unlike other civil litigation, move extremely fast,” Reed says, “but the amount of work that needs to be done in a short amount of time is tremendous, and it costs a lot of money.” While it may be done in a few weeks, it may cost $50,000 or more.

Find Legal Help for Your Noncompete Dispute

Reaching out to an employment law attorney early is “the best tip for either side,” Reed says. “If you spend an hour or two talking to an attorney, going through what your noncompete says, and getting wisdom about the best ways to protect yourself, you can reduce a lot of risk,” Smith-Lee adds.