A non-competition agreement is an employment contract used by employers to limit the ability of an employee to compete with the employer.
When Will a Court Enforce a Non-Competition Agreement?
Whether a court will uphold a non-competition agreement often depends upon the jurisdiction. Some states do not enforce them at all, while some will uphold them only in connection with the sale of a business.
In states where non-competition agreements are enforceable, courts generally will enforce a non-competition agreement when an employer can prove that a non-competition agreement is necessary to protect legitimate business interests, the agreement is reasonably limited in scope and duration, and the employee received consideration, or a benefit, in exchange for agreeing to it.
Legitimate Business Interests
The primary business interests protected under a non-competition agreement are the business’s goodwill (with clients, customers and vendors) and trade secrets. Goodwill is the intangible value of a business’s reputation among other things. Trade secrets are proprietary business information that a business protects from competitors.
Scope and Duration of the Agreement
The law disfavors restrictions on a person’s ability to work, so such a restriction must be reasonable. Another important factor that courts will generally consider is whether the agreement is appropriately limited in its geographical scope and duration. Whether a geographical limitation is reasonable depends on the geographical reach of the employer’s business and the type of business interests to be protected. For example, if the issue is one of trade secrets, the court may find that there is no limitation on the geographical scope. If the issue is one of goodwill, the employee should not be precluded from competing outside the geographical regions in which the business operates.
Generally speaking, the duration of a non-competition agreement has been upheld where it is limited to one year or less.
Consideration for Non-Competition Agreement
For a non-competition agreement to be enforceable, the employer must offer the employee consideration, or a benefit, in exchange for the employee’s promise not to compete. Courts have upheld an employer’s promise of future employment as sufficient consideration. However, if an employer requires an employee to sign a non-competition agreement after employment has already begun, something other than continued employment should be offered as consideration, such as a promotion or raise. The law is not completely uniform on this issue and care should be taken when asking an employee to sign a non-competition agreement during employment. Some courts have even held that a change in position within a company requires a new non-competition agreement.
Non-competition agreements can sometimes be a valid exercise of a business’s right to be free from unfair competition. However, in order for a court to uphold such an agreement, the agreement must be justified by a legitimate business interest, be reasonable in scope, and be accompanied by some consideration.