Precise Words Matter
Early on noncompete clauses were applied mostly to people who really did have a lot of access to what would be considered confidential information. So top executives, salespeople, and scientists who might be working on a proprietary formula or some technical information. Like a classic example, if you are working at a pharmaceutical company and are exposed to the formula to make a certain drug then you will not be allowed to go work for a competitor to avoid the divulgence of that formula.
Non-competes usually apply for a certain period of time, like a year or two, and can cover a certain geographic area. Over the last few decades, non-competes have expanded way beyond the top of the corporate ladder.?
The majority of employees either are not fully aware of these clauses or if they are they won't challenge a non-compete. They don't have the resources for it, or they don't understand that they can challenge whether or not it is reasonable.
Although to make sure that a person does not go and reveal confidential information to competitors we already have laws and regulations that prohibit this act, i.e civil and commercial laws, intellectual property laws, trade secret laws, NDAs etc. ?
As an example:
Bahrain Labour Law (Law No. 36 of 2012) Article 73:
States that if the employee is in a position to know the secrets of the work then the employer can place a restriction of up to one year for the protection of its legitimate interests.?
Civil Law Bahrain Article 629:
States that the restriction be limited as to time, place and kind of work to the extent necessary for the protection of the legitimate interests of the employer.?
Noncompete clauses will stand nullified in case the termination was due to the employer’s breach of the terms of the contract though.?
People are advised to actually read their contracts, and it goes both ways for the employer and the employee.
I recently had a client who had started a company and just used an employment contract taken off the net for his employees to save time and money. That contract did not have any non-compete clause, later when one of his key employees quit, he was very apprehensive that his inside information might get shared and there was nothing much that he could do to avoid it.?
We know there are laws out there but firstly they stipulate that the employer has the right to put in the contract this kind of a restrictive covenant to safeguard its legitimate interests. Well, if the employer has not put in an adequate clause then he cannot stop the employee from going and taking work at his competitor’s. Secondly, the law stops employees from exposing sensitive information to a competitor, but this disclosure may not be easily traceable, which can be done so stealthily that it will be hard to track it. Lastly, if the employer does sue his ex-employees it will surely be a long drawn arduous task to pin them down.
Isn’t it better to just draft contracts wisely!
Similarly, a very interesting case arose recently pertaining to this non-compete clause.
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Two executives, Annamary Holbrook and Brian Murphy, held executive positions at Frontline Technologies Group, an educational software company owned by Thoma Bravo, a large private equity firm. They both signed equity agreements with Thoma Bravo, which included non-compete clauses that prevented them from working with its competitor for one year after leaving the company. However, when they left Frontline to join LINQ, a competitor of Frontline, both Thoma Bravo and Frontline filed lawsuits against them and sought an injunction to enforce the non-competition restriction.
In the plain language of the contract, though, the noncompete clause applied to the Parent company, not Frontline.?
Their Equity Agreement restricted them to not work for a competitor of the Parent Company for one year, there was no mention of Frontline. However, the executives were employed by Frontline, not the Parent Company.
The executives argued that they had not violated their employment contracts because the non-compete clauses only restricted them from working for a competitor of Thoma Bravo, not Frontline itself. The court agreed with the executives, ruling that the language of the contract was clear and unambiguous. The court also rejected the argument that the executives had breached their confidentiality agreements by sharing confidential information with LINQ, ruling that the contracts did not establish a clear connection between these restrictions and the protection of Frontline's own confidential information.
“Even if the defendants provided ‘service’ to the parent through their work for Frontline, the claims still fail”, the ruling says, because “the noncompete provisions are expressly tailored to the ‘business’ or ‘business line’ of the parent—not Frontline.”
“This case presents a textbook example of why parties should ensure their contracts say what they mean and mean what they say,” Vice Chancellor Lori Will said in her ruling dismissing the complaint.?
This scenario is a reminder to companies and their portfolio companies to exercise caution when drafting restrictive covenants with employees, such as non-compete and confidentiality clauses. The precise words of the contract matter, even if one or more parties may have had other intentions. It is important to ensure that the language of these covenants and anything said in the contract is unequivocal, and that it accurately reflects the parties' intentions. Failing to do so could result in a court enforcing the language as written, even if it does not entirely capture the intended scope.
As for the employees if you find the noncompete clause too onerous in terms of long duration, too wide in scope you can always challenge it to avoid getting strapped by an unconscionable clause.
At Ascend Legal, we understand that clear and unambiguous contracts are essential for protecting your business interests. Our team of experienced contract lawyers can help you draft and review contracts that are tailored to your specific needs and that minimize the risk of future disputes. We can also help you negotiate contracts with other parties and ensure that you are getting the best possible deal.
If you need help with any aspect of contract law, please contact Ascend Legal today. We would be happy to assist you.
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