Originally published in The Corporate Counselor - December 2012.
Covenants not to compete are fairly common in employment agreements, especially where an employee may have access to confidential information or possess specialized, unique skills. Noncompete covenants are designed to ensure that employees do not directly compete with the employer when the employment relationship ends. Employers are particularly concerned about an employee’s departure when that employee has access to or control over client relationships, customer lists, confidential information, or trade secrets. Such could be exploited in competing with the former employer. An employer is entitled to the goodwill employees develop through direct client contact, but sometimes when employees leave, they see previously developed customer relationships as low-hanging fruit to steal away from the former employer.
Courts Do Not Agree -
Lawmakers and courts, however, do not seem to share an employer’s enthusiasm for noncompete covenants. Any agreement with the potential to prevent an individual from earning a living will be viewed with skepticism, and noncompete covenants can preclude someone from pursuing a chosen occupation, trade, or vocation. An employee’s training or education may be limited to the particular field covered by the noncompete clause, thereby blocking any possibility of future employment. Naturally, the concern is whether an employee effectively would be prevented from supporting himself or herself and any dependents.
Some also believe that an employee enters the employer-employee relationship at a great bargaining disadvantage: Employees are often seen having little choice but to acquiesce to the restriction on future employment to procure immediate employment. Moreover, such provisions are seen as restraints on trade. Courts are reluctant to enforce a provision believed to artificially manipulate the employment market.
Consequently, noncompete covenants are disfavored under the law. In a couple states, covenants not to compete will not be enforced at all. Virtually all other states enforce them only after exacting scrutiny. Rigorous tests have been promulgated and incorporated into the law for determining a noncompete provision’s validity and enforceability. The tradition has been for courts to void unreasonably broad restrictions.
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