Six Key Questions When Considering a Non-Compete Agreement
Employers and employees often enter into non-compete agreements assuming that they will be enforceable when the employees leave because both sides have agreed on the terms. Not all non-compete agreements, however, are enforceable, and even those that might have been enforceable at the time they were signed might not be enforceable when the employee leaves due to changed employment circumstances or other conditions. Employers and employees considering entering into non-compete agreements or reviewing existing non-compete agreements should consider six key questions that will help determine whether their non-compete agreements will be enforceable.
1. Does the non-compete protect a legitimate interest of the employer?
Non-compete agreements will not be enforced simply to prevent competition. The employer must have a legitimate interest (other than preventing competition) that it seeks to protect through the non-compete agreement. In most states, legitimate protectable interests boil down to trade secrets/confidential information or unique relationships with clients. If an employee has access to trade secrets or confidential information or has unique relationships with clients, a non-compete might be appropriate. If not, the employer should consider whether it has other legitimate interests that would be served by a non-compete agreement or what other steps the employer can take outside of a non-compete agreement. The employer should have a clear understanding of what legitimate interest the non-compete is designed to protect before entering into the non-compete, and the non-compete should be crafted to protect that interest without overreaching.
2. Is the non-compete reasonable in scope, geographic range and duration?
Even when an employer has a legitimate protectable interest supporting a non-compete agreement, the non-compete typically will be enforceable in most states only if it is reasonable in scope, geographic range and duration. The scope, geographic range and duration of the non-compete should be tailored to protect the employer’s legitimate interest. For example, a non-compete that precludes a salesperson whose geographic territory is limited to New England from selling a competing product anywhere in the United States may be overbroad if the employer’s legitimate protectable interest is the salesperson’s unique relationships with clients in New England. Similarly, a non-compete that is not limited to the particular products or business lines serviced by the employee may be overbroad and unenforceable. The scope, geographic range and duration that are reasonable vary from industry to industry, from position to position and often from state to state. Having a thorough understanding of these factors at the outset will help construct a non-compete that is more likely to be enforced.
3. Is the employee getting consideration for agreeing to the non-compete?
A non-compete is enforceable only if it is supported by valid consideration at the time of the agreement. Where a non-compete is part of an original employment agreement with a new employee, the offer of employment is typically adequate consideration for the non-compete. Consideration may become a bigger issue if an existing employee is asked to sign a non-compete. What constitutes valid consideration for a non-compete for an existing employee varies greatly by state. In some states, continued employment of an at will employee is valid consideration for a non-compete. In other states, more tangible consideration – like a raise or promotion -- may support a non-compete. As a result, it is important to understand the consideration requirements of the relevant state before signing a non-compete.
4. Will the employee be paid during the non-compete period?
The parties should evaluate whether the employee will be paid during the non-compete period. In some states, payments of this type will enhance the likelihood of a court enforcing the non-compete because the payments are viewed as lessening the harm to the employee resulting from enforcement of the non-compete. If payments are to be made during the non-compete period, the parties should consider what the payments will be based on. Is base salary enough or should commissions or bonuses be taken into consideration? Will the payments be made if the employer believes the employee is violating the non-compete? Can the employer terminate payments if it does not intend to enforce the non-compete?
5. What state’s law should govern the non-compete?
Different states have different approaches to enforcing non-competes. For example, California has a statutory prohibition on the enforcement of non-competes in many circumstances. Florida, on the other hand, favors enforcement of non-competes in many circumstances. Employers who have all of their operations and employees in a single state have little choice about which state’s law should apply to their non-compete agreements. Employers with operations or employees in several states, however, may be able to choose the law of the most favorable state. This requires analyzing the laws of the potentially applicable states before entering into the non-compete agreement. The non-compete typically also should specify that any disputes must be litigated only in the state whose law is chosen.
6. Should the non-compete provide for arbitration or enforcement in court?
The parties should consider whether to require arbitration of disputes regarding violations of non-compete agreements. Even if the agreement requires arbitration of non-compete disputes as the exclusive remedy for resolving disputes, most non-competes should allow the parties to go to court to seek an injunction enforcing the non-compete since arbitration rarely moves quickly enough at the outset to provide a meaningful opportunity to obtain injunctive relief.
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Taking the time to consider these six key questions before entering into a non-compete and reviewing them again periodically after entering into a non-compete will enhance the likelihood of enforcing a non-compete agreement down the road.
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