Legitimate Business Interest?

Legitimate Business Interest

Courts are more likely to enforce a non-compete agreement if the purpose of the agreement is to protect a "legitimate business interest." But that is a pretty vague term. What does it mean?

Exactly what is a legitimate business interest is hard to say. What courts seem to be talking about is protecting a business from a former employee stealing or destroying a relationship, process, device or invention that otherwise would not have existed but for the employer's special, if not unique, talents or that required the employer to make an unusually significant investment to develop.

That may be a little better, but that is still pretty vague. So, I'll try to explain by example.

Say the employer invests millions of dollars to develop a machine which manufactures something at a lower per unit cost than has ever been possible before. A court will not allow an employee to steal the blueprints for that machine so that the employee can start a competing business.

That was a fairly easy example, because a machine like this would be patentable, but a legitimate business interest does not have to go so far as to be patentable or copywrite-able.

For example, there is a reported case out there which involved an industry in which the sale of just a single unit would involve a lot of money (millions of dollars). The was nothing special about the technology being used, so that the unit wasn't something patentable. It was just very expensive to build.

Further, it was hard to figure out who was interested in buying these extremely expensive units. To suuceed in the business, the employer had to spend thousands of dollars just finding a lead, additional thousands to develop the lead into a potential buyer, and additional thousands closing a deal. In this case, the court protected the employer from an employee who took the employer's client list.

However, courts don't usually protect client lists, because, in most instances, client lists are not that difficult to develop. It might required time, effort and money to develop a client list, but that isn't enough. So, the fact that an investment is required isn't enough. The investment needs to be large and the stakes need to be large.

Some things are not legitimate business interests. For example, employers have no legitimate business interest in any particular customer, although employers wish they did. Client lists may be a legitimate business interest, but the business from a particular customer is not. Competition is the public policy of the state, and competition involves customers being able to change vendors. So, courts are going to be very slow to sanction anything which would inhibit competition.

In my experience, business people will often talk a good game about the virtues of the competitive market place, but one thing they hate being involved in is competition for customers, as well as other things, such as employees. Non-compete agreements are a nod to the competitive marketplace. If it were not for competition, employers would have no need for non-compete agreements. However, non-compete agreements are also an attempt by some employers to distance themselves from competition. Non-compete agreements are an attempt to reduce competition for customers, employees or both.

Simply because an employer does something in a different way does not mean the employer has a trade secret. I have an unusual way of organizing and storing information in my law practice, but those methods would not be considered a trade secret. Not all claims of "trade scret" raises a legitimate business interest.

Further, simply because an employer, for example, teaches you "the business" does not mean that an employer can bind you to him for the rest of your working life. So, that is not a legitimate business interest either.

Employers have come up with increasingly elaborate non-compete agreements which get you to "acknowledge" all kinds of things. In doing this, the employer is trying to "estop" you. That means, the employer wants to be able to argue that you said one thing at one point. You should not be allowed to say something different later.

Although this attempt to estop employees sometimes works, I don't think that employers have a particularly good track record in using estoppel.

The reason for the poor track record may be that courts do not want to be encouraging lying by employers in the way they draft their non-compete agreements.

For example, a non-compete agreement may say that the employer will be disclosing all kinds of trade secrets to a new employee. That statement is an attempt to justifiy the agreement. But if there really are no trade secrets, the court would be only sanctioning a lie by enforcing the non-compete agreement. A court would not want to do that.

posted by David M. Lira  |  Sep 29, 2005 1:10 PM [EST]