Those nuisance noncompetes Featured

9:56am EDT July 22, 2002

The offices of Sladekutter on the North Shore and Labwerks in the Strip District are separated by little more than the Allegheny River. Both are high-technology firms in a similar business, relatively young and led by ambitious, energetic entrepreneurs.

Neither needs the distraction of litigation. But a battle over an employee noncompete agreement between a Labwerks employee and Sladekutter, his former employer, ultimately dragged both into court.

In the end, Sladekutter and Labwerks reached an out-of-court settlement, but not before wasting lots of valuable time, energy — and hard cash — in an ugly, five-month fight full of allegations and counterallegations over an issue that could have been avoided on both sides — if they had approached a noncompete agreement the right way from the beginning.

This recent case illustrates both the importance of making a careful evaluation of employee noncompete agreements long before they are implemented, and the hassle that can ensue when they are poorly executed.

Parties from neither side of the dispute could be reached for comment. But according to court documents, Daniel Dehner worked full time at Sladekutter as a multimedia developer from November 1997 until September 1998. A month after joining the Internet Web design and communications company, Dehner was asked to sign a noncompete agreement, but was offered no additional compensation at the time, in accordance with Pennsylvania law.

From September to November 1998, Dehner worked part time for Sladekutter, continuing as a consultant while working for Labwerks, considered a competitor of Sladekutter’s. In fact, he often used Labwerks’ computers to access Sladekutter’s system to complete unfinished projects for Sladekutter, documents state.

The dispute arose while Dehner was working as a part-time consultant for Sladekutter. At one point, he apparently informed Sladekutter that he was working for other individuals and companies. After he accepted a full-time position with Labwerks, Dehner reportedly stopped accessing Sladekutter’s computers.

In November 1998, court documents say, Sladekutter gained access to Labwerks’ computer system using a combination of Dehner’s name and fragments of his Social Security number and took Dehner’s e-mail and names of Labwerks’ customers. Sladekutter then allegedly contacted two of Labwerks’ customers and demanded that they stop doing business with Labwerks or risk responsibility for interfering with Sladekutter’s business. Sladekutter then took legal action to enforce the noncompete agreement which Dehner had signed while employed there.

Labwerks and Dehner fought back vehemently by seeking a restraining order in federal court to prevent Sladekutter from accessing or attempting to access any computer operated by Dehner or Labwerks. In her summary, the judge ruled that the noncompete agreement which Dehner had signed while he was employed by Sladekutter could not be upheld, since it was signed after he had negotiated terms of employment, a month after he had started working for the company.

The court also found that Sladekutter had violated federal wiretap laws. The judge ordered Sladekutter to return to Labwerks “any and all computer files and other things obtained from accessing the plaintiff’s computer systems.” Finally, the court ordered Sladekutter to contact Labwerks’ clients whom it had previously contacted and inform them that Sladekutter was “subject to an injunction restraining its actions in that regard.”

Both parties are prevented by terms of their agreement from discussing the terms of the final settlement; however, the lawyers who represented the parties agreed to talk in general terms about the issue of noncompete covenants and how you can avoid the excruciating pain of a situation which proves costly, and, in the end, becomes a no-win situation for all involved. Consider the following:

In a business environment in which a growing numbers of employees with specialized knowledge and intellectual property constitute an essential component of a company’s competitive arsenal, companies increasingly are requiring employees to sign noncompete agreements. How they do it, though, is what makes the difference.

Where to start

”At least talk to a lawyer before going down the road to creating noncompete agreements,” says Peter Santos, a lawyer with Dickie McCamey & Chilcote who represented Labwerks.

Essentially, noncompetes must pass certain tests to be valid. First, they must offer a “consideration,” says Jerry Richey, the lawyer with Buchanan Ingersoll who represented Sladekutter. In legal terms, a consideration is something of value offered in exchange for the employee agreeing to the noncompete. Making a noncompete agreement a condition of employment can be an adequate consideration — as long as the condition is enacted at the time the employee joins the company and not some time later.

In the case of an existing employee, however, as Dehner was when he signed a noncompete with Sladekutter, something of value, such as a promotion, a boost in compensation or an expansion of benefits must accompany a noncompete to make it enforceable.

Reasonable terms

The terms of the noncompete must be reasonable in terms of time and geography. For instance, a business may have a legitimate need to limit an employee’s ability to work for another company within its trading area. But as Richey explains, the concept of reasonableness is flexible. A company whose legitimate business interests are global may well limit an employee’s ability to work for a competitor anywhere.

The time period covered by the noncompete can vary as well, depending on the nature of the business. When intellectual property is involved, the temporal and geographic elements might legitimately be extended.

A noncompete must protect a legitimate interest. If an employee has knowledge of his employer’s proprietary secrets that are essential for the company’s business, a noncompete may be in order. In an instance in which a company may have relative ease in recovering its interests (for example, a sales territory where another sales representative could reasonably establish relationships with customers in a year or two), the time restrictions may be more limited.

A level of understanding

Richey suggests that employees make sure they understand what they are being asked to agree to, and if they are uncertain, to check with a lawyer. Employees should evaluate noncompetes in terms of whether they can live with the terms. Richey says employees might ask themselves the following question: “If this is enforced, can I live with it?”

The owners of Sladekutter and Labwerks both know the unfortunate truth that results when you can’t.