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 Arkansas
Arkansas courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect certain business interests of the employer. Such interests include special training, trade secrets, confidential business information and customer lists but only to the extent that a former employee has used the information to gain an unfair competitive advantage. 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. Arkansas courts have determined that the offer of initial employment or continued employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.
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. Arkansas courts have refused to modify agreements in order to make them enforceable because that would mean creating a contract that parties did not agree to.
Examples of non-compete agreements that Arkansas courts have found to be reasonable include:
- A 1-year restriction on an insurance agent from directly or indirectly soliciting, accepting or servicing any policy holder of the former employer because the employer’s market share was 7% and therefore the agent was free to solicit 93% of the business in the area.
- A 200-mile, 2-year restriction against an insurance agent because he was given special training and access to confidential business information, including customers lists that he used to gain an unfair competitive advantage.
- A 1-year, 4-county restriction on a former food products salesperson.
- A 2-year, statewide restriction on the former salesperson of a school supply business.
The courts have found restrictive covenants unreasonable in these situations:
- A 2-year, 39-county restriction on the former salesperson of a cattle and dairy cow liquid feed supplier because it severely limited the employee’s ability to earn a living.
- A 9-state restriction against a former employee of a distribution company because the employee had not worked in all of the nine states. This restriction was not reasonably necessary to protect the former employer’s legitimate business interests.
- A 2-year, 75-mile restriction against a cardiologist because the geographic scope went beyond the former employer’s trade area.
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.