NON-COMPETE AGREEMENTS: ARE THEY ENFORCEABLE?

The most litigated issue in employment contracts is the legality of so-called "restrictive covenant" provisions, such as a non-compete clause which bars an ex-employee from going to work for a competitor. Courts are often reluctant to enforce these restrictive covenants if they impose an unreasonable hardship on the ex-employee. They are strictly scrutinized as to their "reasonableness" in light of the facts and circumstances presented in each case.

A company considering the use of non-compete agreements should keep the following points in mind:

• Whether a non-compete is legally enforceable will be determined by state law. Many states have passed laws that void, or severely restrict the enforceability of non-compete agreements including: California, District of Columbia, Illinois, Maine, Maryland, Massachusetts, New Hampshire, North Dakota, Oklahoma, Oregon, Rhode Island, Virginia and Washington.

• Generally the law of the state where the employee is located will apply. A contractual agreement as to which state law applies may be ineffective.

• Non-competes have to be reasonable to be enforceable. Reasonableness is determined by the courts based on the specific facts in each case. Primary attention is given by the courts to:
  • the geographic scope of the non-compete,
  • the duration of the non-compete, and
  • the type of activity the ex-employee is precluded from engaging in.

• Non-competes are more likely to be upheld if the geographic scope is smaller, the duration is shorter and the type of activity is narrower (e.g., sales position only, versus working for a competitor in any capacity). They are also more likely to be upheld if the employee is only prohibited from soliciting the employer's established customers.

• Many states will void an unreasonable restriction rather than modify it. For example, if a two-year duration is specified, and the court considers this duration unreasonably long, the court may nullify the restriction entirely rather than upholding it for a shorter duration.

• The employee should realize what he or she is agreeing to and receive a benefit in return. This may be initial employment if the non-compete is agreed to at time of hire, or an additional payment to an existing employee for the non-compete.

• Always consult company legal counsel for guidance in preparing a non-compete to meet your particular needs and to be consistent with state law reasonableness criteria.

The following is a sample non-compete provision for inclusion in an employment agreement which defines other terms and conditions of employment.

 

Noncompete/Confidentiality. During my employment with the Company and for a period of ________ after my employment is terminated by the Company or by me for any reason, with or without cause:

1. I will not, in (define geographic territory), directly or indirectly, engage in or own or control any interest in (except as a passive investor in publicly held companies and except for investments held at the date hereof) or act as an officer, director, or employee of or consultant or adviser to, any firm, corporation, or institution directly or indirectly in competition with or engaged in a business substantially similar to that of the Company, including the manufacture or sale of products or the provision of services which the Company was engaged in, or was developing, at the time my employment terminates.

2. I will not recruit or hire any employee of the Company, or otherwise induce such employee to leave the employment of Company, to become an employee of or otherwise be associated with me or any company or business with which I am or may become associated.

3. I will not solicit or have any contact with any person who was a customer of the Company at the time of my termination of employment or within one year prior thereto and for whom I rendered services or with whom I became acquainted with as a result of my duties with the Company.

4. At any time upon the Company's request and, in any event, upon termination of my employment with the Company, I will immediately deliver to the Company all data, manuals, specifications, lists, notes, writings, customer and product lists, photographs, microfilm, tape recordings and all other documents or tangible materials whatsoever, including all copies or duplicates, concerning any part of the Company's activities or concerning any part of my activities as a Company employee. All such documents and tangible materials, and copies or duplicates thereof, including my own notes, are acknowledged by me to be the Company's property which is only entrusted to me on a temporary basis.

5. I understand that in the event of a violation of any provision of this Agreement, the Company shall have the full right to seek injunctive relief, in addition to any other existing rights provided in this Agreement or by operation of law, without the requirement of posting bond. I shall reimburse the Company for all costs, expenses or damages that it incurs as a result of any violation by me of any provision of this Agreement. This obligation shall include court costs, litigation expenses, and reasonable attorneys' fees.

6. I acknowledge that the restrictions imposed by this Agreement are fully understood and will not preclude me from becoming gainfully employed following a termination of my employment with the Company.

7. The foregoing restrictions are limited to (describe the type of activity or job the employee is precluded from taking). [Delete this section if the employee is precluded from taking any position with a designated competitor.]

NOTE: The above non-compete provision is only a sample. Each company is encouraged to consult your legal professionals to develop a non-compete provision which suits your needs and circumstances and may be enforced under the applicable state law.