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Employers may ask workers to sign non-compete agreements when they take high-level roles in the company or gain access to confidential, proprietary information that gives the employer a competitive advantage in the market. However, creating a legal, enforceable non-compete agreement means the agreement must meet various criteria. Courts may decline to enforce agreements that do not meet these strict requirements.
Understanding Non-Compete Agreements
Parties may enter non-compete agreements in several contexts. Most commonly, an employer and employee will have a non-compete agreement as part of their employment agreement. In situations where a small business owner sells their business to a competitor or strategic partner, the buyer may insist on including a non-compete provision in the parties’ agreement that prohibits the seller from immediately launching a new business to compete with the buyer.
The main purpose of a non-compete should be to protect an employer’s or business’s confidential information or competitive advantage. For example, an employer may require a key employee to sign a non-compete because the employee will have access to the employer’s confidential information and trade secrets, such as customer lists, marketing plans, or pricing data, which a competitor of the employer could use to gain an advantage over the employer.
Legal Requirements for a Non-Compete Agreement
Courts frequently impose various criteria for the validity of a non-compete agreement. Some of the standard requirements for non-competes (particularly in the employment context) include:
- Reasonableness in scope, time, and geography: Courts may refuse to enforce a non-compete that has too broad of a scope (restricting an individual from working in industries or sectors outside the employer’s current scope) or geographic reach (beyond the bounds of the employer’s current market) or that lasts too long (presumptively reasonable timeframes last between six months and a year).
- Relation to the employer’s legitimate business interests: A non-compete must focus on protecting confidential or proprietary information an individual may learn while working for the employer, such as customer contacts or pricing information.
Each state has different laws governing the enforceability of non-compete agreements, with several states banning them in the employment context.
Factors That Could Invalidate a Non-Compete Agreement
Circumstances under which a court might invalidate or refuse to enforce a non-compete include:
- The agreement includes unreasonably broad terms or excessive restrictions that preclude an individual from practicing their chosen trade or profession anywhere.
- The employer imposed strict non-compete agreements on lower-level employees who never had access to confidential or proprietary information, making the sole purpose of the agreement to restrict competition rather than protect the employer’s interests.
- The employer breached the employment agreement first.
What Constitutes a Breach of a Non-Compete?
A current or former employee may breach a non-compete agreement by working for another business that directly (or sometimes indirectly) competes with the employer that negotiated the non-compete. Employees may also breach non-compete agreements by starting or acquiring ownership/management positions in other businesses that compete with the employer. Specific competitive activities may include contacting the employer’s current or prospective customers, hiring away the employer’s current employees, or using the employer’s confidential or proprietary information or trade secrets to develop competing products or services.
Remedies for Breach of Non-Compete Agreements
An employer may pursue various remedies for an alleged breach of a non-compete agreement. First, an employer may seek an injunction against the current/former employer subject to the non-compete to require them to cease activity that violates the agreement. Violating an injunction may result in a court holding the current/former employee in civil contempt. An employer can also seek monetary compensation for financial losses caused by the breach of the non-compete, such as lost sales or harm to the business’s goodwill.
Contact an Employment Litigation Lawyer Today
If you are about to negotiate a non-compete agreement, learn more about its legality from an experienced employment law attorney today. Contact Patrick, Harper & Dixon, LLP for an initial consultation to get answers to your questions about the enforceability of non-competes.
