Non-Competes in Connecticut: What You Need to Know
A noncompete agreement is an increasingly common contract which employers and employees enter into to protect an employer’s legitimate business interests. A noncompete agreement restricts an employee’s right to compete with the employer by preventing the employee from doing business with the employer’s customers or by prohibiting the employee from working for a competitor of the employer for a period of time following the employee’s termination of employment.
Connecticut courts require that noncompete agreements be reasonable in duration, geographical scope and the scope of activities which it restricts. If the noncompete agreement is not reasonable in those respects , the courts may refuse to enforce it in its entirety or may limit its application where appropriate. Connective courts have so far declined to provide further guidance on what might be considered "reasonable" in these respects so employers and employees are left in limbo as to whether a particular noncompete agreement will be enforced.
Connecticut statutes relating to noncompete agreements address attorneys and physicians. Connecticut General Statutes Section 20-14h prohibits physicians from entering into contracts that prohibit or restrict the practice of medicine within the state after the agreement’s expiration. Connecticut General Statues Section 20-327a prohibits attorneys from entering into restrictive covenants with respect to the practice of law.
Connecticut courts have never addressed whether non-compete agreements between employers and employees other than physicians, attorney and insurance producers are enforceable under Connecticut law.
Key Aspects of Connecticut Non-Compete Laws
Connecticut courts have long applied a tri-partite test with respect to the enforceability of non-compete restrictions under state law. That a restriction is reasonable in time, geographic scope and necessary to protect legitimate business interests. This article focuses on the court’s recent decisions as to how Connecticut courts have analyzed the reasonable in time and geographic scope.
A restraint is necessary to protect legitimate interests when there is no other way to fully protect the employer’s interest. Legitimate employer interests are generally those protected by a covenant not to compete. They include (1) trade secrets; (2) confidential information; (3) customer relationships, and (4) specialized training. If a covenant is necessary to protect an employer’s interest, a court will then move on to determine whether the restriction is reasonable in time and scope.
While recent courts have focused more on the temporal scope, this restriction is also fundamentally important. Given the transient nature of New England, Connecticut courts have analyzed duration based upon the "time needed to fornicate relationships." If an employer has a client that has been cultivated for 10 years, the Court generally will enforce a two-year non-competition restriction. The idea is essentially a judge cannot pull a number out of thin air. The time it takes to fornicate relationships is fact specific and can vary based on a number of factors. Typically, though, the more value that the employee brought to the relationship, the longer the restriction that will be enforced.
Connecticut courts have generally stated that a geographical restriction is reasonable only when the restricted area limits employers opportunities to exploit the interest sought to be protected. In recent years, courts have focused on the temporal analysis, but the geographic should not be overlooked. Generally, the closer the proximity to a company’s headquarters, the more likely it is that that restriction will be enforced. Moreover, Courts may also analyze geographic restrictions based on other factors. For instance, a sales executive selling high-end apparel products could have a smaller geographic territory than a sales executive selling commercial building products.
While the above is indicative of the current non-compete law in Connecticut, it is important to note that the law is ever evolving. Connecticut courts may change their analytical approach to some of the components of the covenant. As such, it is important to speak with counsel regarding the latest developments in this area.
Changes in Non-Compete Laws in CT
In 2020, Connecticut passed a new law with significant implications for non-compete agreements and the classification of employees as independent contractors. This law mandates that employers provide notice to employees of their rights in the event the employer obtains injunctive relief to enforce a non-compete clause. This notice must be provided to all present employees within the first two weeks of each year, and the Act expands the reasons for which an employer may use to request injunctive relief to include "irreparable harm" to the employer. It is not too early to start on this in December 2019, as it may result in grappling at the end of this year over what happens next.
The legislature also tweaked the enforcement provisions of Section 20-73 which governs attorney’s fees and costs in contested cases. The provision now states if that a party seeking to compel the other to arbitrate or mediate succeeds, then the other party must pay the costs of the motion, "unless the court finds that the motion is frivolous."
The legislature also addressed the Connecticut Uniform Trade Secrets Act, which was approved last summer. The new law broadens the circumstances for which damages may be awarded with treble damages and attorneys’ fees.
These changes in the trade secrets act, along with the aforementioned notification requirements and defense fee recoupment or payment consequences in Section 20-73, are the major updates in non-compete legislation that were enacted in the past few years.
Are Non-Competes Enforceable in Connecticut?
When considering the enforceability of a non-compete, Connecticut courts will begin their analysis by looking to whether the contract in question between the employer and employee is supported by adequate consideration.
In the previous examples, it can be presumed that the new employment agreement between the employee and the employer may be supported by adequate consideration. The former employee receives his or her paycheck and benefits in exchange for the covenants with the employer to not compete (or solicit clients) for a certain period of time.
However, the Connecticut Superior Court has presumed that the following covenants are unsupported by adequate consideration: Assuming the necessary consideration exists, CT courts generally analyze four factors before ruling on whether a covenant not to compete is enforceable in Connecticut. These four factors are:
Ultimately, because many employers will seek only reasonable restrictions that broadly affect competition in securing or retaining customers and clients (limiting the former employee’s competition for a sustainable period of time), even without the consideration and presumptions detailed above, most instances of an enforceable non-compete will fall into one of those four factors. However, as conveyed by Judge Levin in the well-known case of H.B. Fuller Company v. National Starch and Chemical Corp., the purpose of a noncompetition clause "is to protect the property rights of the employer and not to penalize its former employee." (Emphasis in original). Hence, when employing a non-compete covenant, prudent employers should bear in mind that the related restriction must be reasonable under the circumstances – in other words, a non-compete should protect your legitimate business interest.
Non-Compets Not Always Enforceable
In most cases, Connecticut courts look to whether particular restrictions are reasonable in time and geographic scope. But there are exceptions and special rules that apply to certain situations. Here are a few non-exhaustive examples of situations where a non-compete clause may not be enforced. The first several examples are based on the statute itself and the last are based on case law precedents.
- A court will not enforce a covenant prohibiting employees from soliciting customers on behalf of their new employer when the former employer initiated wrongful acts with respect to the employees or the former customers.
- Section 34-50 of the Connecticut General Statutes, entitled "Weakening of trust property of charitable trusts and impostors," prohibits both trustees and former trustees of a charitable trust from using information obtained by them in their capacity as trustee in order to solicit its beneficiaries on behalf of a forprofit enterprise.
- Section 34-250 of the Connecticut General Statutes, entitled "Notice of proposed action against directors, officers, trustees or employees," prevents a corporation from enforcing a non-disclosure agreement against a director, trustee, officer or employee who is responding to a subpoena or testifying in judicial, administrative or legislative proceedings about conduct of the corporation that the director, trustee, officer or employee has reason to believe was in violation of criminal law or a comparable federal or state civil or administrative rule or regulation .
- Section 20-7e(b) of the Connecticut General Statutes, entitled "Ethical and professional standards for licensed professions and occupations," prohibits enforcement of non-competition agreements with licensed health care providers when the non-competition restriction would restrict the licensee from providing services to individuals receiving income replacement benefits under the Connecticut Workers’ Compensation Act, as amended from time to time.
- In Connecticut Bar Assn. v. United States (1977), the court held that a non-compete clause in a sales agency contract between a real estate developer and his commissioned agent was unenforceable because the agency was not exclusive but merely an independent contractor relationship.
- In Electro-Miniatures Corp. v. W. Hous. Seligman & Co., Inc. (1994), the court reversed a jury award of damages for breach of contract against an employee who left his employment with the company to become an employee of a customer of the company. The court found the customer’s action in soliciting the employee, although allegedly unfair, was not wrongful.
- In Analytics, Inc. v. Bimba Manufacturing Co. (2007), the court found a no-hire agreement between the employer and the corporation that acquired the business to be unenforceable where it was clear from the context that the non-signatory corporation was giving up nothing in exchange for the promise not to hire, but instead was merely given the advantage of good employee relations by having the promise made to it.
Employers: How You Can Draft a Non-Compete
Employers can better ensure that their non-compete agreements for employees will be enforceable and valid, by following some best practices. These include the following:
- Share non-compete agreements early in the hiring process: Include a copy of the agreement in your initial offer letter to a prospective employee. They may not review it before agreeing to terms, but at least you will be able to establish that they had the required notice of the terms.
- Close the door: Non-compete agreements must be supported by consideration. In other words, you have to give something in exchange for the employee’s promise not to compete after leaving. With respect to new hires, the offer of any job is enough consideration. With respect to existing employees, you have to provide something of value that they did not already possess. Consideration provided to existing employees can include: a modification of an existing job duty; a pay raise; a promotion or demotion; a lateral move to a position with different duties or an increase in benefits.
- Make sure it’s work-related: The law is clear that the subject matters of non-compete agreements have to relate to current or future employment. So if you want to restrict current or future employment for an employee who works for you, make sure the restrictions are tightly tailored to the employee’s line of work, and that the subject matter of the restrictions gives the employer something tangible of value.
- Let them know what they are missing out on: If you are restricting someone from making money in a certain industry or in a certain way, you must make it clear what they are giving up. There are other ways to structure the non-compete that may accomplish what you are looking for without narrowing it down too much.
- Show them the numbers: You may be able to show how you have invested in your employee through your business, and you may be able to quantify the benefits that await your employee after serving their non-compete period. Explaining these things can help paint a picture of why the non-compete is in everyone’s best interest.
If you don’t know, now you know.
What Employees Need to Know About Non-Competes
For employees in Connecticut, understanding the various intricacies of non-compete and restrictive covenant agreements is crucial. Your employer may ask you to sign a non-compete agreement in order to limit your ability to work for a competing company or to solicit the company’s employees or clients for a certain period of time after you leave their employment. In many instances, even if you are not required by an express agreement to abide by these types of restrictions, the balance of power between you and your employer may make it in your best interest simply to comply with the bounds of the agreement as it is interpreted by your employer. With that said, it is essential that you know your rights before you either sign or comply with any restrictions that your employer claims it can enforce.
As a preliminary matter, whether a non-compete agreement is broadly enforceable against you depends on the type of your employment with the company. For example, if you are an independent contractor, you typically have no obligation to abide by some non-solicitation or non-competition covenant. This may be different if you are employed by a corporation because some cases have held that non-compete provisions are enforceable against a corporate employee even if the employee is not an at-will employee.
For at-will employees, certain terms and conditions must be satisfied; otherwise, non-compete and other restrictive covenant type provisions will not be enforced. Connecticut courts have required that the employer protect some legitimate business interest in order for non-compete provisions to be enforceable. Simply not wishing to suffer competition from its ex-employees will generally not suffice as a legitimate business interest. For instance, a reasonably limited covenant not to compete may be enforceable to protect the company’s trade secrets. Moreover, in cases where the employee is provided confidential and proprietary information about the company’s customers, the covenant to safeguard that practice may be enforceable. However, the common law in this area is not static and each case is highly fact dependent.
An opportunity to negotiate the covenant is useful, but not frequently possible. If you do not have an opportunity to negotiate the terms, you should pay particular attention to the duration and geographic scope of the covenant because the longer the duration and the broader the geographic scope are, the more restrictive the covenant becomes.
These types of agreements require strict observation in order to avoid potential litigation. In fact, many businesses routinely seek equitable relief in the form of injunctive relief against former employees violating a restrictive covenant. If you believe that a restrictive covenant is overbroad (i.e., the time period is too long, etc.) it will be your burden to convince the court that the non-competition agreement is unenforceable. The Connecticut Supreme Court has indicated that all restrictive covenants are subject to strict scrutiny and that the former employer must satisfy a three-pronged test. The employer must demonstrate that (1) it had a protectable interest; (2) the restraint was reasonably limited in time, scope and purpose to protect that interest; and (3) the restraint did not impose a greater burden on the employee than was necessary to protect the employer’s legitimate business interests. While some other jurisdictions do not characteristically rely upon such a three-pronged test, some courts have specifically adopted this test under Connecticut common law.
Because restrictive covenant law is constantly evolving, it is always best to consult with an attorney if you have questions about your own circumstances and if you believe that your employer may take issue with your competing with them or soliciting their customers. Employers are quite savvy at enforcing these restrictive covenant agreements and can wreak havoc on your professional and personal life if you appear to them as someone seeking to violate the covenant and reap the benefits of someone else’s business.
Non-Competes: Resources and Legal Assistance
Attorneys experienced in employment law can help with all legal questions relating to non-competes. However, it might be difficult to find an attorney in Connecticut who has done a significant amount of work with respect to Connecticut non-competes. This might change over time, as the Connecticut cases on non-competes are getting increasingly complex and interesting. As there are not many employment attorneys in Connecticut doing much work with respect to non-compete agreements, many of the attorneys experienced in non-compete agreements are in Massachusetts or New York. However, there are a number of attorneys throughout Connecticut with substantial experience.
For those who do not want to consult with an attorney, there is information about Connecticut non-competes on employment web sites, such as HRhero.com and SHRM.org (those websites are generally about all aspects of employment law and not just Connecticut non-competes) . There are also other non-compete blogs and articles on the web. For instance, a monthly publication called "The Connecticut Employment Law Update", published by an attorney who specializes in Connecticut employment litigation, often talks about the latest Connecticut cases decided which deal with non-compete issues. However, in reading information on non-competes, one must be careful to read from reputable authors and to make sure that the information is the most recent, as the state of the law on this issue is constantly changing. Also, generally, the Connecticut cases on non-competes will not be analyzed in detail by commentators unless the case is an appellate case. Although there are a number of interesting Connecticut non-compete cases decided in the Connecticut Superior Court (which is Connecticut’s trial court), there are not enough of them (yet) to attract non-compete attorneys to write about them.
