Joseph G. Ballstaedt
801.365.1021
joe@snjlegal.com
In Idaho, a non-competition agreement is an agreement between an employer and an employee that prohibits the employee, after the employment relationship ends, from engaging in employment or a line of business that directly competes with the employer. Non-competition agreements generally prohibit employees from selling or offering to sell products or services that are like the employer’s. A non-competition agreement is also known as a non-compete, a post-employment restrictive covenant, or a covenant not to compete. Non-competition agreements are not just for employees. Such an agreement can exist between an independent contractor and a business.
Are non-competition agreements enforceable in Idaho? It depends. Such an agreement is enforceable if it:
- Is not more restrictive than reasonably necessary to protect the employer’s legitimate business interests;
- Pertains to a “key employee” or a “key independent”; and
- Is reasonable in duration, geographical area, type of employment or line of business.
This article discusses each of these three considerations, as well as other considerations relevant to non-competition agreements.
What Are Legitimate Business Interests?
Idaho law explains that “legitimate business interests” are the only interests that a non-competition agreement can protect. An Idaho statute specifically lists some of these interests by way of example (i.e. there may be other legitimate interests). These interests include:
- Goodwill. This interest includes the relationships the business has with clients and customers. These relationships are often formed with the employees of the business, and employers can prevent employees from taking those relationship to other companies, subject to reasonable restrictions. Goodwill also exists when a person is the face of a business, usually through some type of advertising. For example, for nearly a decade, Paul Marcarelli was the public face of Verizon (you may remember the catchy line: “Can you hear me now?”), but in 2016, he switched to Sprint, claiming in new ads that Sprint was just as good as Verizon but half the cost. This change in sponsorship may have been devastating to Verizon.
- Customers, customer lists, customer contacts, and referral sources. Even if no relationship exists between an employee and certain customers or revenue sources, the employer has a legitimate interest in keeping former employees from taking this information to competing companies.
- Technologies, intellectual property, business plans, business processes and methods of operation, as well as financial and marketing information and trade secrets. Similarly, employers have an interest in these types of confidential information staying within their companies and not being used by former employees who move to competing companies.
- Vendors and vendor contacts. Even if vendors are not revenue sources, knowledge of their existence and the relationship that exists with the employer is very valuable. Former employees may be restricted on how they use such information and relationship by being bound to a non-competition agreement.
- NOT general competition. Interestingly, absent from the list of protectable interest in Idaho is competition, which is somewhat strange since a non-compete by definition prevents competition. Let me explain. If a non-compete’s main purpose is to prevent competition, it probably won’t be enforceable. The agreement must focus on protecting the business, not preventing the existence of competition. We live in an economy that thrives on healthy competition, so to be valid in Idaho, a non-compete must be focused more on the interests explained above, which seek to protect improper or unfair competition. A non-compete likely cannot be focused on prohibiting an employee from expanding his skills and talents outside of the company but in the same industry, unless doing so would somehow harm a legitimate business interest other than general competition. For example, if an employee has no relationship with customers or clients, a non-compete probably cannot be used to protect the employer’s goodwill. This would be more restrictive than reasonably necessary to protect the employer’s goodwill. Unless another legitimate interest exists with respect to that employee, the non-compete probably wouldn’t be enforceable.
In trying to determine what a legitimate interest might be, perhaps the best question to ask is whether the non-compete seeks to protect an interest or asset that belongs to the employer or whether it oppresses the employee’s growth by preventing the employee from competing in general, without directly harming or improperly benefiting from the company. If the employee leaves and starts competing in a certain way, time, or place, will it feel like theft? Or will it be appropriate and healthy capitalistic competition?
What Is a Key Employee or Key Independent Contractor?
In addition to being limited to only legitimate business interests, a non-compete in Idaho can only be enforced against key employees and key independent contractors, which Idaho law defines as persons who have gained a “high level of inside knowledge, influence, credibility, notoriety, fame, reputation or public persona as a representative or spokesperson of the employer” and, as a result, have the ability to harm or threaten an employer’s legitimate business interests (which are discussed above). It seems that a key employee or independent contractor only exists when that person is connected to two legitimate business interests discussed above—the goodwill of the company or confidential information. If an employee (or independent contractor) has little or no contact with the company’s clients and little or no knowledge of the company’s confidential information, that employee (or independent contractor) almost certainly could not be considered a key employee (or key independent contractor).
Most employees likely fall somewhere on the spectrum between being quite ordinary and replaceable versus being a key employee. On one extreme end may be a very normal employee at a grocery store who stocks shelves during the night hours when no customers are around. The employee has no contact with customers or knowledge of the business operations. Not a key employee. Conversely, on the other end of the spectrum may be the chief executive officer of a large technology company who knows all the ins and outs of a technology the company is developing in a new and innovative niche industry. This is almost certainly a key employee who can be subject to a non-compete.
What Makes a Non-Competition Agreement Reasonable in Duration?
What constitutes a reasonable time period for a non-compete depends on the facts, but Idaho law has a cap. The law states that in no circumstances can a non-compete be longer than “eighteen (18) months from the time of the key employee’s or key independent contractor’s termination” unless the employee receives some type of benefit (referred to as “consideration”) other than continued employment. So, for instance, if a condition of employment is signing a non-compete and the employee receives only his or her normal compensation, the non-compete can only be for a year and a half (eighteen months) after the employment ends, but the employer could probably extend that timeframe with additional consideration, such as providing an ownership interest in the company.
Interestingly, although a non-compete cannot prohibit direct competition for longer than eighteen months after the employment ends, if the non-compete’s prohibitions last for only eighteen months or less, the non-compete is presumed under Idaho law to be reasonable and enforceable. Thus, most non-competes in Idaho will likely be for eighteen months.
The timeframe for how long a non-compete can prohibit disclosure or use of proprietary or confidential information is not limited to eighteen months, although a longer prohibition may not enjoy the presumption of reasonableness.
What Makes a Non-Competition Agreement Reasonable in Geographic Area?
A non-compete agreement is presumed to be reasonable in geographic area if it is restricted to the geographic areas where the employee or independent contractor provided services or had a significant presence or influence. Thus, if a salesman makes sales in four states, the reasonable restricted geographic area would be within those four states. Sales outside of those states may be permissible, even if the agreement prohibits competition in the entire United States.
Idaho courts have indicated that a non-compete agreement that does not state a geographic region may be unreasonable and unenforceable. However, other Idaho courts have explained that “no geographical limitation may be required if the covenant not to compete is limited to a very few, readily identifiable persons with whom contact is prohibited.”
What Makes a Non-Competition Agreement Reasonable in Type of Employment (or Line of Business)?
A non-compete agreement is presumed to be reasonable as to type of employment (or line of business) if it is limited to the type of employment (or line of business) engaged in by the key employee or key independent contractor while working for the employer. So, if a large construction company has a few lines of business, it may not be able to prohibit all types of competition. For instance, if a key sales employee only made sales for roofing but had no interaction with the framing side of the business, a separate line of business, it would probably be presumed reasonable to prohibit the employee from changing companies and then marketing roofing services, but it may not be presumed reasonable to prohibit him from market framing services. However, because those two services are so similar, perhaps such a prohibition on both types of services (and all construction-related services) would be deemed reasonable. But if a company had its fingers in construction as well as something wholly unrelated, such as selling used cars, the company probably couldn’t prohibit its construction employees from later competing in the car industry.
With respect to protecting goodwill, Idaho courts have explained “a prohibition against doing business with an employer’s clients, without regard to whether a relationship existed between the client and employee, is an overbroad means of protecting the employer’s interest in the goodwill developed by the employee.” Thus, if the employee is restricted from later doing business with clients of a former employer that the employee never knew, that prohibition may make the non-compete unenforceable.
Idaho courts have also indicated that a non-compete agreement that does not state a restricted type of employment or line of business is unreasonable and unenforceable. As one court explained, “A covenant not to compete which prohibits an employee from working in any capacity or which fails to specify with particularity the activities that the employee is prohibited from performing is too overbroad and indefinite to be considered reasonable.”
What Happens If a Non-Competition Agreement is Unreasonable?
Unfortunately for employees but good news for employers, Idaho employers are not necessarily punished if they fail to narrowly tailor non-competition agreements to be no more restrictive than necessary. Idaho law states that if a non-compete is “unreasonable in any respect,” a court must modify the agreement to reflect the intent of the parties and render the agreement reasonable and enforceable. (This type of modifying is called blue-penciling.) In other words, there may be few circumstances where a non-compete agreement is thrown out entirely. Rather than refuse to enforce an unenforceable non-compete, a court will simply modify the offending provisions and make it enforceable—and then enforce it as modified. This required modification incentivizes employers to draft non-competes broadly. If the agreement turns out to be too restrictive and unenforceable, a court will simply fix it for the employer, and it will still likely cover some types of behavior. The employer will still have some protection.
However, the blue penciling rule has its limits. As one court stated, a court’s duty to modify an unreasonable agreement “does not require the court to insert terms into a non-compete agreement in order to render it reasonable when such terms are absent on the face of the provision.” If a non-compete agreement is silent on key terms, a court may not be able to modify and save the agreement.
The requirement of modifying is both bad and good for an employee. It is bad because the employee will still likely be subject to some type of restrictions, even if not the full restrictions in the non-compete. But it is good in that the employee may very likely be able to breach a non-compete that is unreasonable knowing that the unreasonable portion won’t be enforced. For instance, if a non-compete is too long in duration (say three years), and the employee wants to jump back into the competing industry after a year or so, the non-compete may not be a legitimate restriction to such competition. However, without an order from a court or an actual dispute, the employee won’t know for sure whether a non-compete is unreasonable in duration and what duration is reasonable.
How are Non-Competition Agreements Enforced?
What happens if somebody violates a non-compete in Idaho? Employers can ask a court to enforce non-competition agreements by issuing orders that prevent the former employee from engaging in conduct that violates the non-compete. This type of order is called an injunction. The court can also make the employee pay the employer any damages that the breach of the non-compete caused. For example, if the employer can prove that the employee’s conduct led to a decrease in profits or the value of the business, the employee may very well be responsible for these losses. However, these types of losses can very often be difficult to prove, and courts usually won’t force an employee to pay speculative, uncertain damages that an employer claims.
What is the Deterrent Effect of Non-Competition Agreements?
In Idaho and elsewhere, employers may often push the limits of reasonableness with respect to non-competes, requiring employees to sign to terms that probably or maybe won’t be enforceable if taken to a court. Agreements that push the limits have a significant deterrent effect. In fact, an employer may have no intention whatsoever of enforcing a non-compete that it knows to be an improper and unenforceable non-compete agreement, but the fact that the agreement exists often keeps the employee in fear of competing, which in turn prevents the competition. Whether the employee believes the agreement is unenforceable or has doubts about its enforceability, the employee may not have enough courage to breach it and compete against the employer. Sometimes, the employee feels morally obligated to follow the terms of the non-compete. For whatever reason, the employee may follow the terms of the agreement and sit idle. This result is exactly what the employer hopes for.
Do You Need Help with a Non-Competition Agreement?
The information above does not address every aspect or nuance of non-competes in Idaho. It is always helpful to discuss the unique facts and circumstances of your business or employment with an attorney.
If you own a business and want to discuss the benefits of a non-compete for your employees, give me a call. If you are an employee in Idaho who has been offered a non-competition agreement or are considering conduct that might violate a non-compete, I can help. I offer a free consultation. My direct dial is 801-365-1021, and you can e-mail me at joe@snjlegal.com.
