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Noncompete Contracts 139797 office island illustration
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When a vice president of Tyson Foods Inc. quit late last year to join a competitor, he quickly discovered how seriously Tyson takes its legal hold on employees through noncompete agreements.

Rex Holstein left the Springdale poultry and meat company on Nov. 29; nine days later he was being sued.

Holstein, a Tyson employee since 1994, had signed a noncompete agreement in 2018, and the lawsuit said the agreement forbade Holstein’s job shift to Mountaire Corp. of Little Rock, where he’d been hired as vice president of agribusiness.

The case was settled confidentially in January, but noncompete clauses in employment contracts are coming under greater scrutiny nationwide. Arkansas law on the topic is considered “pretty employer friendly” and unlikely to change.

Last year, President Joe Biden signed an executive order urging the Federal Trade Commission to limit noncompete agreements and thus stimulate the economy. “Powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs,” Biden wrote in the order.

Employment lawyers told Arkansas Business last week that they have no indication that noncompete laws will be readjusted in Arkansas.

The laws were changed in Arkansas in 2015, making it easier for judges to adjust terms in noncompete agreements found to be overly broad or unenforceable. For example, judges can shorten a five-year agreement to two years instead, or limit a nationwide restriction to jobs within, say, 100 miles.

For a noncompete to be enforceable under Arkansas law, the employer has to have a legitimate protectable business interest and the restrictions in the agreement must be reasonable in time and scope, said Nate Read, an employment attorney in the Rogers office of Mitchell Williams Selig Gates & Woodyard of Little Rock. And the agreement must be no broader than necessary to protect that legitimate protectable business interest of the former employer, he said.

Noncompete cases are commonly being filed in Arkansas’ state and federal courthouses. “These issues routinely pop up in an employment practice or in the litigation practice,” Read said.

“It’s just a function of people moving to new jobs. And there’s always some raw feelings when people leave and go to a competitor,” he said.

Noncompete’s Harm

The primary intent of a noncompete is to prevent employees from leaving one business and going to a competing business where they would perform the same or similar work.

“Employees without noncompetes could arguably cause financial harm to an employer’s business, being susceptible to poaching by competitor employers,” Regan Gross, HR knowledge adviser at the Society for Human Resource Management, told Arkansas Business via email.

But there’s a downside. Noncompete deals can harm not only employees and wages, but also innovation, entrepreneurship and growth, said Orly Lobel, the Warren Distinguished Professor of Law at the University of San Diego.

“When we are restricting employee mobility, we not only suppress wages … we’re also limiting … human capital use,” said Lobel, who wrote the book “Talent Wants to Be Free.”

She recently testified before Illinois legislators on bills limiting noncompetes, describing harm to “inventive and innovative” ventures. “There’s startups that can’t get good talent because these people can’t move. … So it’s a vicious cycle where you don’t see enough growth.”

At least three states and the District of Columbia have banned noncompetes, with limited exceptions, Gross said. And several states have restricted noncompete agreements in various ways, such as prohibiting them for essential workers and hourly employees.

Blair Bullock, a professor at the University of Arkansas School of Law, said noncompetes also hinder employees’ career growth.

They cannot use an offer from another company in a negotiation for a pay raise because they are locked into a noncompete for whatever period it specifies, she said.

Employers also are frustrated by noncompete agreements because they have difficulty hiring workers in their area, “requiring them to consider the parameters of the particular agreement that was signed, and honoring that language,” Gross said. “Employers also find they need to recruit talent from a greater distance, offering relocation packages or other incentives for job candidates to want to move or work remotely.”

The benefit the employee receives when signing the noncompete agreement is simply the right to work for the employer.

Winning a Case

Noncompete Contracts 139797 Jane Kim
Companies face a heavy burden in winning a noncompete case against a former employee, according to Little Rock attorney Jane Kim. They must show the former employee poses a “real imminent danger” to business. ( Karen E. Segrave)

It’s a high burden for a company to win its case against a former employee, said Jane A. Kim, whose practice area includes employer and workplace issues at the Wright Lindsey Jennings law firm in Little Rock.

Kim said it helps if the company has email evidence of the employee using work emails to transfer company information. “And then you’re going to have to show that the company has been harmed or is being harmed or there’s a real imminent danger of” the company being harmed.

The company also would have to prove it has a legitimate business interest to protect the information in the possession of the ex-employee.

“That’s where it can get a little bit tricky,” Kim said. “Because when a company or representative is being asked very specific questions on this issue, it can be easily revealed, I think, that this is not a legitimate business interest that you’re trying to protect.”

She said what’s likely to survive scrutiny from the courts is a nonsolicitation agreement, which doesn’t prevent an employee from working, but blocks the former employee from contacting the company’s customers for a certain period.

“I think nonsolicitation agreements, nondisclosure agreements, confidentiality agreements, those types of agreements are more powerful” than noncompete agreements, Kim said.

But, she said, if the noncompete is “just going to be viewed as simply preventing an ordinary competition, that’s obviously against public policy and unenforceable.”

Gross said that to keep employees from leaving, companies can use strategies other than noncompete agreements. Firms can rely on retention bonuses that include clawback provisions if the employee leaves within a certain time, she said.

“Employers should make their workplace a desirable one where employees aren’t easily lured by competition,” Gross said.

Tips for Noncompetes

Noncompete Contracts 139797 Nate Read
Nate Read of Mitchell Williams Selig Gates & Woodyard in Rogers. ()

Employers should think first before requiring employees to sign a noncompete agreement.

The question should be, “Does the employer actually have a legitimate business interest to protect?” said Jane Kim, an employment lawyer at the Wright Lindsey Jennings law firm in Little Rock, because that’s typically the threshold for a judge to rule in a company’s favor.

The company has to have provided an employee proprietary or confidential information that’s otherwise unknown to its competitors and that an employee can use to gain an unfair advantage, she said.

After an employee signs a noncompete agreement, it shouldn’t be “put on the shelf or in the file and never looked at again,” said Nate Read, an employment attorney at Mitchell Williams Selig Gates & Woodyard.

A company needs to ensure that a noncompete makes sense for the individual in terms of the job duties and the information the employee has access to, he said.

“Let’s say you have an employee who has been with the company for 10 years,” Read said. In the last decade, the company might have expanded its trade area and the employee’s duties might have changed.

“And so that legitimate protectable business interest … may also change,” Read said. “So you want to make sure that you’re looking at that agreement to make sure that it still works for you, that it’s still fair and equitable, and is likely to be enforced.”

Noncompete agreements also typically bar, for a prescribed period, former employees from contacting customers and former colleagues and suggesting they follow the employee to the competitor.

Read said if a company has a boilerplate noncompete agreement it uses for every employee and company officers haven’t considered what they are protecting and the deal’s duration, then the noncompete agreement is less likely to be enforced.

“Therefore, it has less value to you,” Read said. “And if the agreement you have, for whatever reason, isn’t enforceable, then you don’t have that protection you think you do.”

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