Non-Compete Agreements: One Size May Not Fit All

Locke Lord LLP

In December 2019, the Economic Policy Institute (EPI) released a report that revealed a continued increase in the use of non-competition agreements in the workplace. According to the EPI study, between 36 and 60 million American workers have entered into non-competition agreements that, to varying degrees, would operate to preclude the employee from accepting employment with or providing services to a competitor. However, the landscape for whether a non-compete agreement is enforceable is consistently changing under specific state laws. Nonetheless, while non-competition laws may vary from state to state, several common requirements are present in most state’s analyses of enforceability.

  1. Consideration – Like any contract, a non-compete agreement must be supported by adequate consideration. Many states have determined that merely the initiation of or continuation of an employment relationship is sufficient consideration for a non-compete agreement. Other states, such as Texas, require the non-compete agreement be tied to or part of another enforceable agreement. Most often, this comes in the form of a confidentiality or non-disclosure agreement whereby an employer provides an employee with its confidential and/or trade secret information, in exchange for a limited non-compete agreement.
  2. Reasonableness – In addition to adequate consideration, most jurisdictions view non-compete agreements with disfavor and require them to be narrowly tailored to the information sought to be protected or the employment relationship at issue. Specifically, a non-compete is more likely to be enforced if it is drafted to be no more restrictive than reasonably necessary to protect the business interests of the employer in time, geography, and scope. For example, most jurisdictions uphold covenants of 1-3 years in duration, although enforceability depends on the specific facts at issue. Geographic restrictions in a non-compete should generally cover only the territory in which the employee had responsibility or the territory of the business about which the employee received confidential information, but, again, enforceability will depend on a number of factors. Finally, the more narrowly tailored the scope of activities in a restrictive covenant, the more likely it is to be enforced.
  3. State-Specific and Fact-Specific Determination – While non-compete agreements are enforceable to some extent in most states, some jurisdictions, such as Oklahoma, North Dakota, and California, have complete or severe restrictions on any form of non-compete agreements. Other states, such as Massachusetts, Illinois, and New Jersey, have recently enacted laws that operate to ban non-compete agreements against low wage earners or workers that are classified as “non-exempt” under applicable wage and hour laws. Other states have legislative bills currently pending that could greatly affect the prospective enforceability of non-compete agreements in that jurisdiction. For this reason, non-competition agreements drafted with the intent to be used in multiple jurisdictions present complications and potential enforceability issues.

The use of non-compete (or non-solicitation) agreements by employers may provide great benefit to an employer by preserving the quality of the employer’s workforce, protecting the integrity of confidential and trade secret information, and preventing unfair competition in the marketplace. However, state-specific requirements and ever-changing statutory and common law standards make it more important than ever to carefully tailor and draft these agreements to ensure the best chance of enforceability.

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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