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 District of Columbia

District of Columbia courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect certain business interests of the employer such as trade secrets or customer relationships. Factors considered when determining reasonableness include the nature of the business, the character of the service performed by and the station of the employee in relation to the area in which the employer is to be protected and whether the employer or employee acted in bad faith.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. District of Columbia courts have determined 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 may also have the requisite consideration if the period of continued employment is substantial.

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 as long as the employer acted in good faith and did not engage in serious misconduct.

Examples of non-compete agreements that District of Columbia courts have found to be reasonable include:

• A 1-year, 100-mile radius restriction prohibiting a former stockbroker from competing against a a financial services company.
• A 1-year restriction against a former management consultant from “rendering competitive services” to clients of the former management consulting and strategic planning employer and from hiring employees because of the substantial investment made in them, the vital importance of the client base to the business and the close contacts established by the consultants with the client base.
• A 3-year restriction against an electrical engineer from becoming employed by a client of the employer within three years after leaving the employer.

The courts have found the following restrictive covenants unreasonable:

• A 3-year, 6-state restriction against the former employee of a fireproofing company because the job was characterized as “hard, and not particularly skilled labor” and it involved no trade secrets.
• A 1-year restriction against soliciting customers of a coin-operated machine-leasing 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.