It has been a few years, but we have in the past signed non-compete agreements, one employment-based preliminary to a short stint in television news, one of the places where such contracts are commmonplace. So we were a bit confused at first by the sudden emergence and somewhat surprising Senate floor defeat (narrowly, 16-18) of Senate Bill 1203, which on its face provides a specific state policy supporting the use of such contracts.
The catch is that non-competes are and have been enforceable as contracts; the headlines about the bill providing for their enforceability seemed a little off-kilter. What exactly did this bill do that caused such concern?
File this under one of those cases where a little research into the law helps with clarity.
As a core matter, non-competes are clearly a reasonable device in some business environments. In television news, for example, a station may spent a great deal of money and other effort promoting some of its on-air personnel, a real investment in that employee. If the employee walked out from station A one day and turned up that evening on station B, there’s no question station A would have been damaged; you could almost consider that its investment was stolen. (We wouldn’t go quite that far but we would understand the principle.) And in a variety of other businesses, comparable cases could be fairly developed.
But there are limits. To say that a person leaving an employer cannot practice his profession for an unduly long time, for example, is simply punitive – it turns the employee into a reasonably-paid indentured servant.
Like most other states, Idaho long has allowed legally for non-competes; also like many other states, the courts have been moving toward balancing the interests of employers and employees in deciding the validity of non-competes. The core purpose of 1203, which was proposed by the Idaho Association of Commerce & Industry, is to end that balance and swing the weight down solidly on the employers’ side.
To read SB 1203 reasonably, you need to look back at a 2001 Idaho Supreme Court case.
That decision, in Pinnacle Performance, Inc. v. Hessing, takes a thorough look at non-competes, and emerges with a somewhat skeptical view of them. Here’s some of the core outcome from that decision:
Covenants not to compete in an employment contract are disfavored and will be strictly construed against the employer. . . . In order to be enforceable, a covenant not to compete must be ancillary to a lawful contract, supported by adequate consideration, and consistent with public policy. . . . A covenant not to compete contained in an employment contract must be reasonable as applied to the employer, the employee, and the public. . . . In other words, a covenant not to compete is reasonable only if the covenant: (1) is not greater than is necessary to protect the employer in some legitimate business interest; (2) is not unduly harsh and oppressive to the employee; and (3) is not injurious to the public. . . . A covenant not to compete will be held unenforceable if the covenant is unreasonable in duration, geographical area, or scope of activity . . .
In other words, a noncompete generally is okay if it doesn’t exceed an employer’s real needs, if it isn’t “unduly harsh and oppressive” to the employee and if it doesn’t injure the public. Which seems reasonable, and which has been the touchstone on the matter in Idaho since.
In the September 2001 Advocate (the state Bar journal), two attorneys from the large Moffatt Thomas firm reviewed the decision. The decision did put a weightier legal burden on employers, they wrote, but that is “because of the risk that employers may abuse such covenants, the potential effect of such covenants on the employees’ abilities to earn their livelihoods, and the societal cost of losing the services for which the employees have been trained and in which they may have gained considerable experience and expertise.”
If the legal realm of non-competes seems like a fair point for a balancing of interests, SB 1203 shows its hand right away in its title: the “Protection of Employers’ Legitimate Business Interests Act.” Counterpart protections for employees seem not have entered in.
It might also have been presented as a directive to courts to butt out of reviewing such contracts for reasonableness: It says specifically as a statement of policy that “protective covenants are to be generally upheld.” Moreover:
(1) Protective covenants that provide reasonable protection to legitimate business interests shall not be deemed void as against public policy or as against public interest.
(2) Protective covenants shall not be construed or interpreted by employing any rule of contract construction that construes a protective covenant narrowly, against the restraint, or against the drafter of the contract.
And check out this language, again clearly aimed at any court look at balancing interests: “Although there may be circumstances under which a protective covenant restricting postemployment or postcontract activity may be overbroad or unreasonable, if the activity sought to be enjoined in a particular circumstance would invade the legitimate business interest of the party seeking enforcement, the protective covenant shall be enforced notwithstanding potential overbreadth.” [emphasis added] Read that again, and note allowance for “overbroad” and “unreasonable” provisions.
The bill theoretically refers only to “key employees,” but its descriptive language s loose enough as to allow employers to include almost anyone – and it includes independent contractors as well.
You begin to see why this went a little far even for a legislature accustomed to piling on to business interests. The Senate debate was actually fierce, with Senator Elliot Werk, D-Boise, being called down at one point for using the phrase “by God.” (The horrors.) More pungently, he pointed out that “No other state in the nation has done this – none.”
The advocates of 1203 sounded as if they didn’t see a big deal here. Idaho already allows for non-competes, after all, and, as Senator John Goedde, R-Coeur d’Alene, remarked, “We tell the courts all the time what to do, and I don’t know that this is any great leap.”
The leap would have been in the legislature’s instructions to the courts: To approve non-competes that are – to reverse the prohibitive language from Pinnacle – greater than necessary to protect the employer in some legitimate business interest; unduly harsh and oppressive to the employee; and injurious to the public.
It was a close vote, at the Idaho Legislature.
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