What are Non-Competes?
Non-Compete Agreements, also known as covenants not to compete, have common usage in the sales, service, and professional sectors. Whether by inclusion in employment contracts, franchise agreements, buy-out agreements, or separate agreements, non-competes are commonplace. Essentially, a non-compete restricts an individual’s ability to engage in a similar business after leaving their employment.
The general idea behind a non-compete is to prevent the new business owner from stealing customers from the old business. As an example, let’s say Banjo Bob and I want to form Banjo World, LLC to sell banjos to the mass public. At some point Banjo Bob and I want to go our separate ways. Banjo Bob may require me to sign a non-compete that says that for a period of time after the dissolution of Banjo World, LLC I will not compete directly with Banjo Bob. A non-compete applicable to the old owner of a company may restrict the former owner from competing for a set period of time in a specific geographic area or from soliciting customers . A non-compete applicable to a former employee may restrict the employee from competing inside a specific geographic area or from having specific customers of the old employer.
A non-competition agreement is enforced in Mississippi as long as it is reasonable in time, territory, and activity. Reasonableness is usually a question for the judge to decide based on the facts of the case. In terms of territory and activity, the restriction should be no broader than necessary to protect the business from unfair competition. As to duration, the typical non-competition agreement restricts the former owner or employee for a three year period.
A non-compete email from an old employee to former customers of the old employer is not a violation of the non-compete if the former employee competes against the old employer after the email is sent. Likewise, if the former employee competes against the old employer after the customer reaches out first, then the email is likely not a violation of the non-compete agreement.
Requirements for Enforceability in Mississippi
Mississippi courts look at three criteria to determine whether a non-competition agreement is valid and enforceable, these are: (1) a reasonable and legitimate purpose; (2) reasonable restrictions as to time and territory; and (3) other factors pertaining to the public interest which outweigh any hardship for an employee repairing to compete with his former employer.
Mississippi courts have the strongest enforceable non-competition agreements in the Southeastern region. The Mississippi Supreme Court even went as far to say that the Circuit Court would not have to inform the parties of its conclusion that the non-competition provision is valid. The circuit judge could enter an order to that effect without further explanation.
In Mississippi, it is common for agreements to include a choice of law provision designating Mississippi law. Some employers use this provision to attempt to limit the enforceability and scope of non-competition agreements in other states.
In 1992, the Mississippi legislature passed Section 75-4-3 which validates employment contracts limiting employees from operating competing business. This legislation has been cited by Mississippi courts to uphold non-competition agreements.
Essential Elements of a Non-Compete
So what do you need to make a non-compete enforceable in Mississippi? For a non-compete to be enforceable against a former employee, it must (1) be supported by consideration, (2) be reasonable in its geographic scope, (3) be limited in time, and (4) not be overly broad in the scope of activities that it prohibits. Mississippi courts have held that the provision of confidential information in exchange for an employee’s agreement not to use the confidential information is sufficient consideration. In other words, the employee doesn’t need to receive anything other than the confidential information as a form of consideration to make the non-compete enforceable. For example, in the Sudduth case, the employee could not prove that he was terminated for reasons other than a legitimate business purpose. His non-compete that followed his ownership interest was also valid because the employee received confidential information in exchange for signing it. Crafting the right type of reasonable geographic restrictions and limiting the time that the non-compete will cover is important. Mississippi courts will only enforce a non-compete if it is limited to a particular county or counties. If a non-compete is not limited in scope geographically to one or more Mississippi counties, then the offending provision will be severed from the rest of the non-compete and the remaining terms of the non-compete will still be enforceable. For instance, in Pearson v. Interstate Group Adm’r of S. Miss., Inc., the former employer sought an injunction and money damages after the former employee began working for a competing business in the same industry as the former employer. The non-compete at issue stated that the former employee "agree[d] that for a period of [twelve months] from the date of termination of [his] employment, [he] will not . . . engage within the state in which Employee performed services for Employer during the time of the Employee’s employment with [the company] in a business competitive with that of the Company." In this case, the court held that geographical restrictions outside Mississippi rendered the non-compete unenforceable. Thus, an attempt by an employer to enforce such a non-compete which contains provisions restricting a former employee or former franchisee from engaging in business in a state or other geographical area outside of Mississippi will be seen as an overreach by the employer or franchisor and void as against public policy.
Common Limitations and Challenges
Many employers encounter challenges in enforcing agreements not to compete against Mississippi employees. The typical limitations found in agreements not to compete are set forth in the following sections of the Mississippi Code Annotated: Section 75-4-1 and Section 75-4-3.
Section 75-4-1 limits the time period of an agreement not to compete to no more than three years after the date of termination. Section 75-4-3 limits the geographic territory within which the agreement not to compete may be enforced if a court or arbitrator deems it to be too broad. A Mississippi court will not enforce an agreement against an employee unless it is confined to the city in which he worked or to adjacent counties where the employee worked and only if such enforcement is reasonable under the circumstances.
One defense that employees typically try to use when asserting a noncompete is the employee’s contention that the noncompete lacks consideration. If, for example, the noncompete is presented to the employee after he’s been employed for a year and he is told that if he doesn’t sign the noncompete then he will lose his job, a court is likely to find that this does not constitute consideration. Additional consideration may be in the form of a promotion or a raise.
Another defense frequently used by employees is that the employer’s business interest is not protectable. A good example of this is an employee being forced to sign a noncompete agreement when the employee has no access to customers or potential customers. To the extent the employment agreement is in writing and made a part of the offer of employment, the employer will have a strong argument that the employee’s employment is the consideration for an agreement not to compete.
The Mississippi Court of Appeals has upheld a non compete in light of a very restrictive time period and detailed description of the restricted area. McCormick v. Louisiana-Pacific Corporation is a case that originated in Arkansas which involved a Baton Rouge, Louisiana company. In this case the employee was selling lumber for the employer within a county in Arkansas when he terminated his employment. He was forced to sign the non compete at the time he was offered employment. The agreement not to compete prohibited him from calling on any of his customers in Arkansas for a period of five years after the termination of his employment. The geographical restriction was 100 miles from any of the customers’ places of business within the state of Arkansas. The employee had previously been employed with a competitor prior to being hired by the plaintiff and was aware of customer contacts in the area. In what appeared to be an unusual ruling, the Mississippi Court of Appeals upheld this non compete.
Non-Competes: Real-Life Examples of Enforceability
Examples of Enforceable and Unenforceable Agreements in Mississippi
In the case of Tetracore, Inc. v. Johnson, et al., 2002WL 31002842 (Miss. Ct. App. 2002), the Mississippi Court of Appeals upheld the lower court’s judgment finding a non-competition agreement unenforceable. The business in question was Tetracore, which was a distributor and manufacturer of food and cosmetic products. The parties entered into a settlement agreement which included a covenant not to compete. After the owner died, the co-owner, Judge Smith, acquired all of his interest in the business, and continued its operation under the Tetracore, Inc. name. After Judge Smith got involved, the dispute over the enforceability of the covenant not to compete began. The portion of the agreement in question contained a three year non-competition clause and a one year non-disclosure clause.
The court found the agreement unenforceable for two reasons. The first reason was that the consent required by the statute (specifically Miss. Code Ann. Section 15-1-371(1)) required authority to act by the shareholder/spouse of the corporation. Because the spouse did not have authority to act for the corporation, the court ruled the agreement to be unenforceable based on the language of the statute. The second reason the court ruled the agreement unenforceable was because the period of enforcement was for an unreasonable length of time. The court made clear in its ruling that it did not find the former shareholder to have a substantial interest in the business , and it was therefore unnecessary for the other shareholders to be protected for three years against competition from this former shareholder.
In the case of Arthur J. Gallagher & Co., et al. v. Babcock, 2011WL2286614 (Miss. 2011), the Mississippi Supreme Court upheld the granting of summary judgment for the defendant former employees. The court found that the non-competition agreement that the plaintiffs wanted to enforce against the former employees was not restrictive enough geographically to meet the requirements of Mississippi code section 15-1-371, which requires a "geographically reasonable restriction." The court stated in its opinion that since the counties listed in the agreement were not a major regional market for insurance, this further served as evidence that the agreement was overly broad. The court did not consider the fact that the restrictions were clearly limited to the former employer’s major markets, and found the agreement overly broad based on the fact that only three of the counties in the agreement were actually a major market for insurance.
According to these decisions, an employer desiring to enforce a non-competition agreement must have a legitimate protectable interest, and the restrictiveness must be for a period of time and an area of practice reasonably necessary to protect that interest.
How to Draft an Enforceable Non-Compete: A Guide
In addition to having the essential terms in a contract, our firm also believes that the contract must be tailored to the legal issues. We do not believe that boilerplate forms should be used for non-compete agreements for several reasons. First, using a form that has not been specifically tailored to Mississippi law can be a fruitless endeavor. Mississippi courts have ruled that an out-of-state non-compete agreement will not be enforced. Second, we believe that each contract should accurately reflect the true intentions of the parties. Even good boilerplate forms may contain an outdated concept that forces them to be rewritten. So what steps should a business take to see that their non-compete is enforceable? Here is my list:
- Seek advice from a lawyer familiar with the legal issues surrounding non-compete agreements.
- Make sure your non-compete is tailored to meet the business needs of your company.
- Before you hire a new employee, have the terms of the non-compete negotiated.
- Make sure that the employee is given separate consideration for signing the agreement.
- Prior to the employee’s first day of work, be sure they have signed the non-compete agreement.
- Have the non-compete agreement signed in the presence of a witness who will avoid any potential conflicts of interests. A witness should not be associated with either party, nor should they be party to the agreement.
- Acknowledge receipt of each page of the agreement in the presence of a witness.
- Make sure the employee receives a copy of the non-compete agreement.
Non-Competition Agreement Alternatives
While non-compete agreements are a common way to protect an employer’s interest in their confidential information and prevent their former employees from working for their competitors, some employers prefer not to use them (or may be prohibited from using them by a contract with the employee). The preferred alternative is generally a non-disclosure agreement. With a non-disclosure agreement, an employee agrees to keep confidential information secret and not disclose it to any other person. While it generally cannot prevent an employee from disclosing information already known to the public, if the information to be protected is public, the non-disclosure agreement is generally satisfied as long the former employee does not tell others that the information is confidential.
However, not everything that a business considers confidential is capable of protection. For example, formulas, patterns, customer lists and other information may be protected by a non-disclosure agreement . In some cases, court action may be necessary to prohibit conduct that would otherwise violate the terms of a non-disclosure agreement. However, such action is generally more likely to be successful than attempting to enforce a non-compete agreement after the former employee has left the employment of the former employer.
Another option sometimes used in lieu of a non-compete agreement is what is called a non-solicitation clause. Such clause generally prohibits the former employee from soliciting existing customers or employees of the former employer. This type of clause is generally less likely to violate Mississippi’s law because there is some public interest in protecting existing business relationships, but it is still somewhat unclear whether a non-solicitation clause would hold up because Mississippi case law does not yet address the issue.
Whatever your choice, non-compete agreements and related agreements can be structured to help protect the employer’s interest in their business as part of the general employment documents given to new employees.