The Importance of Non-Compete Agreements

by Revision Legal
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It is a common business practice for employers to require their employees to sign a non-compete agreement as part of the terms of their employment. Use of non-compete agreements are a particularly popular practice in situations where the employee will have access to sensitive or confidential business information as part of their routine job duties. While it may be impossible to prevent someone from leaving a particular job, non-compete agreements can be used to prevent the former-employee from working for a competing company.

What is a Non-Compete Agreement?

A non-compete agreement is a legally binding agreement between the employer and the employee that prevents the employee from competing with his or her employer after the employment relationship has terminated for a set period of time in a specific geographical region. The purpose of a non-compete agreement is to discourage and/or prevent an employee from leaving a position with an employer and taking a new position with a competitor in which he or she can utilize any valuable information gleaned while working the previous job.

Non-compete agreements help employers to protect a company’s goodwill and trade secret information and are also often used as an effective tool for retaining talented employees from making a move to a competitor, which enables the company to benefit longer from its investment in training valuable employees. One thing that non-compete agreements cannot do is put limitations on an employee’s right to earn a living once he or she leaves an employer. The courts do not look kindly on non-compete agreements that place unreasonable restrictions on an employee’s ability to earn a living once leaving a job.

What Needs to be Included in Non-Compete Agreements?

In order for a non-compete agreement to be legally valid the agreement must:

  • Be for the purpose of protecting a legitimate business interests of the employer (such as retaining valuable clients or customers or valuable business information),
  • Be reasonable in scope, time (i.e., duration), and geographical restriction (i.e., the non-compete agreement is only enforceable within a set number of miles from where the employer is located), and
  • Be supported by consideration (i.e., money or some other benefit to the employee) when the agreement is signed by the employee.

Employers that are considering using non-compete agreements with their employees need to consider to what degree non-compete agreements will help protect the company. If there is a real risk that key employees can make off with confidential business information and take that information to a competitor, then the adoption of a non-compete agreement might be a smart move for protecting legitimate interests of the company. But it is also important for companies to realize that some employees pose very little risk in terms of loss of confidential information and may not necessarily need a non-compete agreement, especially if those employees are never exposed to confidential business information.

Reasonableness is Key for Non-Compete Agreements

What the non-compete agreement prevents the employee from doing, for how long, and in what geographical region must be reasonable for the non-compete agreement to be upheld by the court if it is ever disputed by the employee. What is considered reasonable for these specific terms depends on the particular industry, type of business, and whether enforcement of the non-compete agreement would cause detriment to the public.

By way of example, it would be unreasonable to require an employee to sign a non-compete agreement that lasts indefinitely or that is applicable to the entire United States because these restrictions unfairly and unreasonably place restraints on employees’ ability to earn a living once terminating their employment relationships with their former employers. In another example, a non-compete agreement for a highly specialized doctor might be unenforceable if enforcing the non-compete agreement would deprive the public of access to the much-needed specialized doctor.

When the court finds a non-compete agreement to be unreasonable in terms of scope, time or geography, the court may exercise discretion by either modifying the non-compete agreement to narrow the scope, duration, or geographical restrictions, or the court could choose to hold the non-compete agreement unenforceable in its entirety.

The Rules Concerning Non-Compete Agreements Vary From State to State

There are no broad federal rules that cover how non-compete agreements work. Rather, the rules that govern non-compete agreements vary from state to state. Some employers are surprised to find out that one state is receptive to non-compete agreements while other states are strongly opposed to their use. This can be a particularly significant problem if the employer expands the company into a new state without conducting thorough legal research on the employment laws of the state and taking the temperature of general perception of non-compete agreements by the state’s courts before making the move.

Non-compete agreements can be a good way to establish expectations and ground rules for employees at the outset of their employment. A non-compete agreement can clarify expectations that employees who leave their employment situations with the company are expected to also leave behind company information, data and property when they go.  

Striking a Balance and Setting Expectations

You need your company’s non-compete agreements to be valid and enforceable. Preparing a legally valid non-compete agreement for incorporation into your employment agreements and hiring paperwork can be challenging because it requires striking a balance between protecting your company’s legitimate business interests and not preventing the employee from pursuing a living once the employer-employee relationship is terminated. You need to protect your business interests and rights without creating a risk of future litigation by way of a non-compete agreement that is overly restrictive.

Business attorneys can help prepare a non-compete agreements that are right for your business. Your lawyer can also help you if you have concerns that an employee has breached a non-compete agreement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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