In a Noncompete Bind?

If you find yourself out of a job in this downturn, keep in mind that restrictive covenants may limit your next move. If you are a party to such an agreement, you could face a costly lawsuit if you go to work for a competing company or firm or start your own—even if you are terminated without cause. Consider these steps before leaving, accepting new employment, or starting a competing business.

  Locate and review all documents you signed during employment related to any terms or restrictions after employment.

  Consult with an attorney who has experience interpreting noncompetition and other restrictive covenants. Deciding if a restriction against competition is valid in a particular jurisdiction is challenging because the law is unpredictable and intensely fact-based. A noncompete covenant may be unenforceable if the time limit is too long or if the restriction is too broad. Several courts have revised time limits to a shorter, reasonable time. In other cases, the covenant may be struck down altogether if it is too harsh or does not strictly comply with a state statute.

  Do not solicit clients while you are still employed. Several courts have enforced nonsolicitation agreements against accountants, especially when there is evidence that the accountant took the client list upon departure. The definition of solicitation depends on state law, but likely includes phone calls, e-mails, letters and personal visits to clients.

  Negotiate with your former employer. Discuss with your attorney the pros and cons of negotiating with your former employer before soliciting clients or opening a competing business. There is a tendency to believe the firm or company will not discover your breach. In general, litigation concerning postemployment restrictions across all industries has increased approximately sixfold in the last 30 years. In an economic downturn, firms and companies are likely to be more aggressive than ever to protect their business.

  Check for and calculate the expected payout from a reimbursement or liquidated damages clause. In noncompete agreements with accounting firms, courts tend to favor an objective formula that is similar to the price a third party would pay to purchase the book of business. It may be cheaper to pay the reimbursement amount rather than litigate. Depending on the state law, reimbursement of up to 150% of fees charged to the client have been upheld, but excessive fees, such as 200%, have been struck down as an unenforceable penalty.

  Consider taking a relocation offer if that option is available. In a recent Michigan case, an accounting firm closed one office and offered to relocate the employees to another office. The employees decided to stay where they were located and open their own business. The court held that the accountants could be prohibited from rendering professional accounting, tax, consulting or any other service provided by the firm at the date of termination to any firm client for two years. The court stated that “[c]hanges in markets and economic conditions occur frequently, and one cannot reasonably expect an office, plant or store that becomes not viable economically and not in the strategic interests of the owners to remain open” and dismissed claims by the former employees for frustration-of-purpose and fraud in the inducement (Rooyakker & Sitz PLLC v. Plante & Moran PLLC, 276 Mich.App. 146, 162 (2007)).

  If the matter goes to court, be prepared to show proof of the hardship you have experienced in finding a replacement job in the prohibited area. That would include the number of rejections you have received, the costs of relocating, any of your special medical or other personal needs, and any hardship to former clients who can no longer obtain your services if the covenant is enforced.

—By Sandra S. Benson, J.D., an instructor in the accounting program at Middle Tennessee State University. Her e-mail address is sbenson@mtsu.edu.