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Employer Threatened with Legal Action Over Broad Use of Non-Competition Agreements

    Client Alerts
  • November 07, 2014
On their face, post-employment non-competition agreements seem like a great idea. What employer wouldn’t want to keep their employees from jumping to a competitor? However, one employer’s experience with broad use of such agreements serves as a cautionary tale against indiscriminate use of post-employment restrictive covenants.

Earlier this month, 37 members of Congress requested that the Federal Trade Commission and Department of Labor begin an investigation of the Jimmy John’s sandwich franchise. This request was based on company policy that requires all employees to sign broad non-compete agreements as a condition of employment. Employees, including hourly sandwich makers, sign an agreement in which they promise not to work for any other sandwich shop within three miles of any Jimmy John’s in the U.S. for two years following employment.

The Congressional request accused Jimmy John’s of engaging in intimidation of employees and anticompetitive business practices by expanding use of non-competes to every employee in the company. Typically, such agreements are only used with executives, salespersons and technical employees who have access to highly proprietary information.

In addition to the possibility of anti-competition claims, such broad use of post-employment covenants is legally suspect. Most states will only enforce non-competes where the employer can demonstrate a true competitive threat to the company faced when an employee leaves and begins work for a competitor. It would be very difficult for an employer to argue that these factors arise every time an hourly worker leaves. More troubling, if the employer requires non-competes for such lower level employees, an executive under the same agreement could attempt to invalidate it by arguing that indiscriminate use of non-competes by the employer proves that there was no legitimate competitive concern in play with regard to that executive’s agreement.

Jimmy John’s may have relied on a deterrent effect of its agreements instead of any actual intent to seek enforcement against hourly employees. However, as demonstrated by the request for government investigations, such tactics can have unintended negative legal consequences.