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 Oregon Prior to 2007 Changes to the Statute
Oregon law, for non-competition agreements entered into prior to January 1, 2008, permitted non-competition agreements between employers and employees if they were entered into upon initial employment or upon a "bona fide advancement" of the employee. Such agreements can protect certain business interests of the employer such as trade secrets, confidential information and customer relationships Factors considered when determining reasonableness include the hardship an agreement puts on the former employee, its effect on the general public and the restrictions placed on time, territory and activity of the former employee.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Oregon statue provides that the offer of initial employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate. An agreement signed after the employment has begun must be accompanied by a "bona fide advancement" which involves more than just an increase in salary or other additional compensation. It must also include an actual change in the employee's job status or duties performed.
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. If a court finds an agreement is unreasonable, it may modify the agreement so that it does not unduly infringe on the former employee's ability to work.
Examples of non-compete agreements that Oregon courts have found to be reasonable include:
- A 1-year restriction against a regional sales manager of a footwear company from working for any competitor, wherever located.
- A 90-day restriction against a former employee of a temporary employment service provider.
- A 2-year restriction against a former lumber company employee from working for any of the former employer's customers.
The courts have found the following restrictive covenants unreasonable:
- A 18-month restriction against the former branch manager of a construction crane manufacturing and servicing company from working the state of Oregon and Washington as well as 65 other locations in the United States because it would have prevented the former employee from working in the industry entirely.
- A 3-year restriction against a former employee barring competition within 300 miles of his place of employment and any subsidiary of his former employer because it would have covered nearly every major population center in the United States.
The Law in Oregon After the 2007 Changes to the Statute
The 2007 Oregon legislature made several changes to the statute covering non-competition agreements entered into after January 1, 2008. Such agreements associated with a new employer/employee relationship must be included in a written offer of employment received by the prospective employee at least two weeks prior to the first day of employment. An agreement entered into after employment has begun must still be accompanied by a "bona fide advancement" for the employee, as described above. Moreover, such agreements may apply only to employees:
In addition, no agreement may be enforceable for longer than two years.
- who are exempt from overtime pay (generally those employed in administrative, executive or professional occupations);
- who have access to trade secrets or other competitively sensitive business information; and
- whose annual gross compensation at termination exceeds the median family income for a four-person family under Census Bureau guidelines.
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.