Charitable Nonprofits’ Use of Noncompetition Agreements: Having the Best of Both Worlds

Abstract

For years, individuals have been challenging the noncompetition agreements they entered into with their employers on the basis that the agreements violate public policy. However, in a competitive marketplace, courts and legislatures in many jurisdictions are reluctant to invalidate otherwise reasonable noncompetition agreements. Perhaps they are right, at least when it comes to the general class of nonprofits and to nonprofits that are protecting their interests against for-profit entities. As for charitable — or § 501(c)(3) — nonprofits that are attempting to protect their interests against other charitable nonprofits, however, the decision-making bodies should reconsider their position. Unlike traditional for-profit entities, whose main goal is profit maximization, charitable nonprofits are organized and operated to benefit some greater good. As a result, charitable nonprofits receive donations from individuals and corporations, as well as tax breaks from the government, which are unavailable to for-profit entities. At the same time, charitable nonprofits use many of the same tools that for-profit firms utilize to maximize profits, including noncompetition agreements. Thus, charitable nonprofits are able to benefit from an anti-competition, profit-maximizing tool while also reaping the rewards of their tax-exempt status. In short, charitable nonprofits (wrongly) enjoy the best of both the for-profit and nonprofit worlds. This article discusses the unique nature of the charitable nonprofit’s mission and the tax benefits conferred on charitable nonprofits by the federal and state governments. It then discusses noncompetition agreements and demonstrates that charitable nonprofits’ use of noncompetition agreements is contrary to their mission and tax-exempt status, as well as to the public interest. Finally, the article proposes an amendment to the federal tax code that would render unenforceable any language in a noncompetition agreement that prevents an individual from leaving the employment of one charitable nonprofit for employment at another.