Non-Compete Agreements in Employment & Their Legal Enforceability
Many employers ask or require employees to sign non-compete agreements in addition to an employment contract. These are contracts, governed by state law, in which an employee promises not to work for a direct competitor for a specific period of time after leaving the employer. Non-compete agreements are valuable to employers not only because they protect against the loss of employees, but also because they may provide added protection for a company’s confidential information, such as client lists or trade secrets.
Client lists and trade secrets can give companies competitive advantages. Trade secrets are formulas, patterns, compilations, programs, devices, methods, techniques, or processes that a business has made reasonable efforts to keep secret from others. Employees who leave one job for another or who are laid off or fired, may take these secrets to be used for personal advantage. For example, when an employee is laid off and faced with unemployment, he or she may want to open a competing business. A non-compete agreement prevents this possibility.
Are Non-Compete Agreements Enforceable?
The extent to which a non-compete agreement is enforceable varies depending on the jurisdiction. Courts value an individual’s right to earn a living, and non-compete agreements may have to pass certain criteria to be enforceable. While the criteria and analysis differ from state to state, non-compete agreements usually need to be “reasonable,” supported by a good business reason, and meet the requirements that all contracts must meet to be enforceable.
In order to be enforceable, a non-compete agreement must include an offer, acceptance, intent, and a benefit or “consideration” to the employee in exchange for his or her promise. The benefit could be as simple as getting the job or, for an existing employee, getting a promotion or raise.
What do courts consider “reasonable”? While there are differences among the states, it is generally established that non-compete agreements should not violate public policy. They cannot last for an overly long time period, cover too wide a geographic area, or prevent a former employee from working in many different types of businesses. For example, a non-compete agreement that prohibits a doctor from engaging in medical practice indefinitely anywhere in the United States is not likely to be found reasonable in most jurisdictions. Similarly, a non-compete agreement that prohibits a software engineer from working at any software or hardware company in the state for 20 years is not likely to be found reasonable in most jurisdictions.
When a non-compete agreement lasts for more than two years, it is likely to receive closer examination by a court and less likely to be considered reasonable. However, there is no set rule, so it is better to consult an attorney before signing an agreement like this in any state except those that usually void non-compete agreements.
Generally, a business should have a good business reason for asking an employee to sign one of these agreements. It should not use it to punish the employee for leaving. Also, these agreements are more likely to be enforceable in instances when employees truly do acquire a company’s trade secrets or client lists.
In some states, such as California, non-compete agreements are not legally enforceable except under very limited circumstances. In those states, employers may use other agreements, such as non-solicitation agreements or nondisclosure agreements, to protect client lists, employees, and trade secrets when an employee leaves the company.
