In the Trenches: Post-employment restrictions at Acme are dubious

Jan. 13, 2009
In this edition of "In the Trenches," Acme deals with an employee who values peace of mind over money. Remember, only the names are changed to protect the innocent.

Acme is a component manufacturer selling to other manufacturing firms through its experienced business-to-business sales force. Michael Rhodabotz has been part of that Acme team for the past decade. Jerry Coe, Acme’s sales director, stole Michael away from Nadir Industries, a major Acme competitor, by offering a larger base salary and a lucrative commission schedule. Michael was the most successful inside sales professional on the Nadir lineup. At Acme, he was an outside sales representative, earning even more.

Michael owed his success to an uncanny ability to remember the details about the individual price negotiations that took place with each of the 80 or so customers in his territory. Also, he could calculate volume discounts in his head, which, from a customer’s point of view, made Michael come off as a professional’s professional. Adding his charming personality to the mix made him a winner.

Winning has a price, though. Michael constantly felt stressed. He wasn’t in the best physical shape. He spent a lot of time on the road. His family life left much to be desired, but he hoped that at least the folks at home appreciated the standard of living he provided for them.

When Michael was diagnosed with multiple sclerosis, he took stock of his situation. After he got past the initial panic, he decided to contact Nadir about returning to his former job, which would provide a much more favorable work/family balance during the few useful working years remaining to him. Nadir happily extended a generous offer and Michael accepted it.

When Michael tried to resign, Jerry made a counteroffer, raising both Michael’s base salary and commission rate, plus providing him with two administrative assistants to lighten the load. Michael felt flattered that Acme wanted to keep him, so he changed his mind and decided to stay with Acme. After a while, however, Michael realized his situation was worse. Because of his better compensation package, he felt compelled to complete more sales of more products to more customers.

Several months later, Acme reinstated a long-dormant policy of requiring key employees to sign noncompetition agreements that were to remain in effect for three years after an employee left. In his tenure with Acme, Michael had never been asked to sign such a document. He signed it, thought better, snatched it back and explained that he wanted 24 hours to confer with his wife and lawyer before turning it in. The next day, Michael handed Jerry the signed agreement but refused to accept the nominal cash payment that Acme was offering as consideration for signing.

When health and stress concerns again intruded on his peace of mind, Michael announced his intention to return to his former job at Nadir. Jerry made serious efforts to keep him from leaving, even offering to pay the full amount of his group health insurance premium. Michael wouldn’t budge. He returned to work at Nadir two weeks later.

Michael was back at Nadir for only a few days before he made a substantial sale to one of Acme’s customers. Less than three weeks later, Michael was served with a lawsuit seeking a temporary restraining order to block him from working for Nadir or any other Acme competitor within 150 miles of any Acme distribution center in its nationwide network. The suit sought to prevent him from contacting any of Acme’s customers and from disclosing any proprietary Acme information.

Michael fought the restraining order in court, arguing that he was obliged to sign the noncompetition agreement under duress and that both the three-year term and the geographical restriction were unreasonable.

How could this situation have been avoided? How do non-compete agreements relate to employment in “at-will” states? Should employees be forced to sign such agreements? Does it make any difference that Michael refused the token compensation? How does the next employer avoid being blindsided by a candidate’s undisclosed agreement? How does Michael’s health play into the lawsuit?

An attorney says:

Agreements not to work for a competitor following the termination of employment don’t relate to or affect the employment at-will doctrine in any way. The employment at-will doctrine, recognized in virtually every state, merely allows either the employer or the employee to terminate the employment relationship at any time and for any reason. A noncompetition agreement, on the other hand, restricts what the employee can do after the employment relationship has ended.

An employer can “force” an employee to sign the agreement not to compete by making it a term or condition of employment. In other words, the employer can terminate an employee who refuses to sign a noncompete agreement.

Agreements not to compete are governed by state law, and states take different positions as to what post-employment restrictions are enforceable. In some states, an employer must provide an employee with consideration beyond continued employment if a noncompete agreement is to be enforceable. In those states, Michael’s agreement would be unenforceable because of this lack of consideration. In most states, both the temporal and geographic restrictions in a noncompete agreement must be reasonable. Michael might make favorable arguments on this score, as well.

To avoid hiring employees restricted by noncompete agreements, employers should require new employees to represent that they aren’t bound by any such agreement at the time they accept the offer of employment.

Julie Badel, partner
Epstein Becker & Green, P.C.
(312) 499-1418
[email protected]

A corporate consultant says:

The main issue is the noncompete agreement. Michael made choices based on what he felt was the right decision, based on the information he had at the time. To my way of thinking, Michael made two errors. The first was not being clear about what he wanted or needed out of his employment situation. The second was locking himself into the noncompete agreement when there were indications that his health might require a change in work routine.

On the first issue, Michael was not clear about what he wanted or needed with regard to his work situation. Not having much more information about the work environment, or culture, at Acme and Nadir, it’s tough to be firm about how specifically Michael could have or should have handled the situation. Acme obviously valued his external sales ability, but the relentless efforts to keep him in a situation that was obviously detrimental to his health and well-being indicates Acme valued profit over employee well-being. In such a case, employees must look out for themselves.

Michael could have spent time up front thinking not just about the opportunity to rejoin Nadir, but also contemplating Acme’s reaction. The scenario doesn’t indicate that Michael ever discussed the prospect of a different job description with Acme, based on his health and well-being. He basically placed Acme in a position of having to react to a situation. The nugget here is that Michael made the decision to go back to Nadir based on the reality that he needed a different pace to sustain his health and well-being. He compromised the decision because of the added benefits of the counteroffer. Michael should have done a better job anticipating the situation he was placing himself in, and the situation he was placing both Acme and Nadir in.

Decisions we make can be difficult and can lead to unintended consequences. The more we can plan and keep from surprising others, the greater possibility of mutually agreeable outcomes. Michael could have first worked with Acme to try to shape a better work situation while supporting Acme’s sales goals. For instance, he could have offered to develop a sales training program and to work with other Acme sales representatives to improve their potential in exchange for a less strenuous pace of work and better health-care coverage. Whether Acme went for such a deal or not, Michael would have had a better-defined set of circumstances from which he could make better decisions.

On the issue of signing a noncompete agreement, he signed it. Acme was within its rights to ask Michael to sign the document. Michael was free to sign or not sign the agreement. Again, the scenario doesn’t go into detail, but the implication is that signing the document was a term of employment. Not signing was likely the equivalent to tendering a resignation. The act of signing the document is what would be important; not taking the cash consideration is probably irrelevant.

Michael might have been in a strong position to negotiate based on his record of performance and the generous compensation package Acme offered to keep him around, but he didn’t. Michael also might have misevaluated Acme’s commitment to follow through on the noncompete agreement. In either case, the agreement was signed and should have been honored once it was signed.

The situation could have been avoided by Michael thinking through the possibilities, discussing his needs with Acme before agreeing to return to Nadir and doing so before the noncompete agreement was tendered. Whether he’s in an at-will state or not, I believe it would be best for both parties to be straightforward with their positions. In a broad sense, no one should be forced to sign a noncompete agreement, but people are free to not sign, and therefore not take or retain the position. When Michael finally agreed to make the jump back to Nadir, Nadir should have made its employment offer contingent on not having noncompete or other restrictions that would impede his ability to fulfill his new responsibilities.

Michael’s health probably has little bearing on Acme’s restraining order because it appears that Michael switched positions but was continuing to do similar work.

Tom Moriarty, P.E., CMRP
Organizational Reliability Professional Services Consultant
(321) 773-3356
[email protected]

An academician says:

This seems to be more of a legal question than a management issue and I defer judgment to my legal colleagues.

Noncompetition agreements vary widely in their enforceability depending on the state, as well as the conditions. The fact that Michael signed such but didn’t accept cash payment for consideration for signing might have voided the contract, but again, this is a legal question. And, who knows, this may be an Americans with Disabilities Act (ADA) case.

I think noncompetition contracts are important and critical in some industries. Otherwise, an employee could walk out the door with trade secrets and customer lists and you could do nothing about it. But, the contracts should be a condition of employment for employees who are in critical positions, and they should be signed when the employee begins employment with a company or is assigned to a critical position. In that way, the employee is fully informed at the beginning as to what the ground rules are and can make a decision as to whether to work under those arrangements.

The next employer has an obligation to ask whether the prospective employee has signed a noncompete contract with a previous employer, as well as learn the conditions of that contract. Once the new company has that information, it can decide whether or not to hire that new employee, and for what position. I’ve seen cases in which the employer hires a prospective employee who is under a noncompete contract because they thought they could break the contract in court. Or, they assign the new employee to a less-sensitive position until the contract expires.

Professor Homer H. Johnson, Ph.D.
Loyola University Chicago
(312) 915-6682
[email protected]

Plant Services is looking for a plant professional to join the panel of experts that offers its opinion each month. Contact Russ Kratowicz at [email protected] to participate.

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