Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer's legitimate business interests from an unfair competitive advantage with the employee's right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In Hawaii
Hawaii law allows non-competition agreements restricting the use of trade secrets, customer contacts and confidential information during employment and afterward as long as they are sufficiently limited in terms of duration, do not place an undue hardship on the employee and are not injurious to the public. Such agreements must not substantially lessen competition or create a monopoly in any line of business.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Hawaii courts have determined that the offer of a higher salary or promotion is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate. However, the courts have not yet addressed whether an agreement signed at the inception of employment or the promise of continued employment is sufficient as consideration.
Reasonableness in Time and Geographic Scope
Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted.
Examples of non-compete agreements that Hawaii courts have found to be reasonable include:
- A 3-year restriction against a former employee of a travel "briefing" company because it did not unreasonably preclude the former employee from pursing an occupation and supporting her family. The court modified the geographic restriction from the entire state of Hawaii to Honolulu only.
- A restriction from disclosure and use of the former employer's confidential information and trade secrets did not fail for the lack of a time limitation because it had "a built-in limitation: [it] endure[s] only as long as the information is kept secret."
- A 3-year, statewide restriction against a former employee of a film processing company.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.