In my niche market a lot of the people I work with work on a contractor or consulting basis with their customers or clients. Because of this, I have been asked non-competes pretty regularly. Non-Competes are one of those areas of law that are very different depending on what state you are living in so this article is going to be a very non-specific overview of what a non-compete agreement is, and how courts typically analyze their validity.
That said, keep in mind that one of the states I am licensed in (CA) does not allow non-compete agreements or language in any contract and there are a few other states that feel this way. The other state I am licensed in (FL) usually favors them and will uphold them if the right circumstances are there. So you can see how different things can be from coast to coast…
But I digress, let’s review shall we?
What are we talking about?
A non-compete agreement or clause is an agreement where one party (usually an employee or contractor) agrees not to start a similar business, steal customers from, or directly compete with another party (usually an employer). These are considered restrictive covenants so they are pretty heavily scrutinized by the courts. The non-compete does not take effect until after the parties working relationship has ended.
Employers (although not the only people who use these) typically require these types of agreements for multiple reasons, including the protection of their IP (trade secrets), and the goodwill they have worked so hard to develop.
Determining the Validity.
As I stated, because a non-compete places a limitation on an employee’s right to earn a living, they are closely scrutinized when they are the subject of a legal dispute. So, what is it that a court looks for in determining the validity of an agreement like this?
For starters, the following must be present:
- The agreement must be supported by consideration at the time it was signed;
- It must protect a legitimate business interest of the employer; and
- It must be reasonable in scope, geography, and time.
The employee must receive something of value as a result of signing the non-compete. This is usually, the job the employee gets as a result of signing the agreement. However, if an employee signs a non-compete after employment has begun, the simple promise that employment will continue is not usually enough to meet the consideration standard. If this is the case, the employer must provide something else of value to the employee in exchange.
Legitimate Business Interest.
This particular requirement can be litigated heavily because, to be honest, what is a legitimate business interest, and aren’t there other ways to protect those things without restricting someone else’s right to work in their field?
Often times employers are seeking to protect specific trade secrets and goodwill. Goodwill refers to the current customer and vendor relations that employer has established. They also try to protect certain confidential information from being used by the employee, either as a way to establish a business of their own or to harm the employer’s business in other ways. For an employer to prove that certain information is confidential they have to show that they have taken reasonable measures to keep that information secret and that it gives the employer a competitive advantage.
The most common issue with this relates back to the ability of the employer to protect the above interest in other less restrictive ways. If you are in a very specialized industry it is more likely that the use of a non-compete is the best way to protect this information, but in some industries, a non-disclosure can do the trick.
Reasonable in duration, scope, and geographically.
The court performs a balancing act when deciding whether or not to enforce a non-compete. They weigh the need to protect an employer’s business interests with the burden placed on the employee if the agreement is enforced.
The reasonableness of the duration of an agreement will depend on the facts of each case. In some instances and industries, a 5-year non-compete is valid while in others 6 months is the most reasonable length. The same goes for geographic area limitations. If an employer has no online presence and works only within a localized area, a restriction of 50 miles may be too broad whereas an online business might have a restriction of 50 miles from headquarters and that is fine. Courts look at the services provided by the employee and the importance of those services to the business. As a rule of thumb, courts have refused to enforce a non-compete that prevents an employer from working in a geographical area where the employer does not currently do business.
Courts can and will alter certain troublesome provisions of a non-compete and then enforce it against an employee as edited, or they may choose not to enforce it at all if it is too broad and restrictive.
What to do before signing.
Again, the law in your area is going to differ on non-competes so if you are presented with one I highly suggest finding an attorney in your area to review it before you sign. It is important to know what your rights are, and of course what they will be when the relationship has ended and the non-compete is at play.
If you’ve already signed one and you’re interested in leaving your current job-I would get a copy of what you signed and take it to an attorney for review before you make any moves at your current job.
I hope this helps, and as always send an email to me at Shannon@montgomerypllc.com if you have questions on non-competes!
Please note that this is not meant to be legal advice for you or your situation, this is merely some legal research and knowledge on the given topic.