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 Alaska
Alaska courts generally disfavor non-competition agreements because they tend to restrain trade and place a hardship on former employees’ ability to earn a living. Because of this, the courts scrutinize such agreements carefully taking into account the following factors:
- whether the duration and geographic scope of the restrictions are reasonable
- whether the employee was the sole contact with a particular customer
- whether the employee had access to confidential information or trade secrets
- whether the competition being restricted is unfair or merely ordinary competition
- whether the inherent skill and experience of the employee is being stifled
- whether the benefit to the employer is outweighed by the detriment to the employee
- whether the restrictions bar the employee from her sole means of support
- whether the employee’s talent was developed while employed by the employer, and
- whether the forbidden employment is merely incidental to the main employment
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 overbroad, it may modify the agreement so that it is rendered enforceable.
Examples of non-compete agreements that Alaska courts have found to be reasonable include:
- A restriction unlimited in terms of geographic scope and duration against a real estate broker from contacting the former employer’s client list.
- A 2-year restriction against a former architectural services partner from past or present clients of the firm.
The courts have found the following restrictions unreasonable:
- A 5-year, statewide restriction. The Alaska Supreme Court remanded the case saying that lower court could modify the agreement to make it enforceable.
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.