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Labor, Employment and Benefits
Newsletter - January 2000
 
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Noncompete Agreements: Time Moves Faster In The Internet
 
 January 1, 2000
 

Employers, particularly those in a high-technology industry, commonly require their employees to sign noncompete agreements as a condition of employment. There are many good reasons for such agreements: for instance, an employee may have access to proprietary technology, or to confidential customer lists and pricing information.

Courts carefully scrutinize and strictly construe noncompete agreements, and the rules for enforcing them vary from state to state. Nevertheless, as a general rule, a noncompete agreement is enforceable if

  • it is necessary to protect an employer's legitimate business interest
  • it is reasonably limited in geographic scope and duration
  • enforcement is consonant with the public interest

It is difficult to say for certain exactly how long a duration is too long. A one-year duration is typically considered reasonable, but there are cases in which courts have enforced noncompete agreements with durations as long as three years.

The emergence of the Internet has brought sweeping changes to the business world, however, and the law governing noncompete agreements is not immune. In EarthWeb, Inc. v. Schlack, (S.D.N.Y. Oct. 27, 1999), a federal court refused to allow EarthWeb, an Internet publishing company, to enforce a noncompete agreement that prohibited a former employee, Schlack, from working for a direct competitor of the company for one year.

Schlack had been responsible for the content of EarthWeb's Web sites. When he resigned to take a position with ITworld.com, a startup Internet company based in Massachusetts, EarthWeb sued to enforce the noncompete agreement. EarthWeb claimed that ITWorld.com was a direct competitor, and that Schlack had access to trade secrets and confidential information that he would inevitably use or disclose in his new position.

However, the court refused to enforce the agreement. The court first ruled that EarthWeb did not prove that ITworld was a direct competitor. The court noted that EarthWeb bore a heavy burden of proof, given "the difficulty in assessing the characteristics of ITworld.com, an embryonic business entity that will compete in a nascent industry which is evolving and re-inventing itself with breathtaking speed."

More importantly, the court ruled that the one-year duration of the noncompete agreement was unreasonably long: "When measured against the IT industry in the Internet environment, a one-year hiatus from the workforce is several generations, if not an eternity."

Although some courts have "blue pencilled" such provisions to make them shorter and enforceable, the court refused to do so because "the agreement as a whole overreaches."

Each noncompete case turns on its own unique facts, of course, and this decision arose under New York law. The case law may differ in other states. Nevertheless, this decision may influence other courts considering noncompete agreements involving Internet companies. Employers should be careful that their noncompete agreements are reasonable in scope.

While a court may enforce a one-year noncompete agreement in appropriate circumstances, it may be prudent to provide for a shorter period when preparing contracts in the IT industry on the theory that half a loaf is better than none at all.

For more information please call Edward J. Naughton at 1-888-688-8500.

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