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Tuesday, October 18, 2016

Can Non-Compete Agreements Be Enforced?

Hiring a new employee or training an existing staff member in new skills is a costly endeavor. Employers want to make sure that the money is well spent and the employee will not use the skills or knowledge of the employer's business to compete. Employers try to restrict employees from going to competitor and employees, of course, do not want to be limited to working for only one company especially if a better offer comes along or things do not work out with the employer. Employees also make an investment in their skills and capabilities, and may bring to the employer decades of knowledge of their industry, their profession, or customers. Each side has valuable rights and interests that need to be balanced. What often results is that the employer requires employees to sign a document that restricts who the employee can work for if he/she leaves the current employer.

While permitted in most states (California being a notable exception) Courts typically disfavor “covenants not to compete” or “non-compete agreements.”  Therefore, the terms and provisions of these contracts must not be overly restrictive of the employee.  In order for a non-compete to be upheld, the document must “be reasonable in scope, geography, and time.”  It cannot last for years on end, or prevent the employee from working anywhere in the entire state or states. Likewise, an employer cannot prohibit an employee from working in a large variety of industries, especially if the restriction includes industries wholly unrelated to the employer’s line of work. 

Two other elements are analyzed by a court to determine the validity of a non-compete agreement:  (1) there must be mutual consideration between both the employer and employee at the moment the contract is signed and (2) the non-competition agreement must protect “a legitimate business interest of the employer.”  Preventing a former employee from working for an employer’s business rival, or preventing disclosure of trade secrets or personally identifiable information of important clientele, are typically considered justifiable business interests.

Non-compete agreements are generally implemented to protect a company’s most important assets:  its reputation and its confidential information.  However, the terms protecting these assets cannot be overly broad or vague.  Thus, in evaluating the “reasonableness” of a non-competition agreement, the court will conduct a “balancing test.”  This is a comparison of the employer’s need to protect its “business interests” with the “burden that enforcement of the agreement would place on the employee.” 

The validity of non-compete agreements is decided on a case-by-case basis. The court will consider circumstances such as the length of time certain information will be kept confidential, and the company’s reasons for limiting the employee's job search to a geographical area. If the court finds that the agreement serves a valid interest and does not exceed the range necessary to protect that interest, the entire agreement may be upheld. The agreement cannot prohibit the employee from earning a living or be against the public's interest (for example, it is in the public's interest to permit people to hire any attorney they wish to, so non-compete agreements are generally prohibited in law firms).

The court also has the option of doing away with overly intrusive terms in a non-compete, rather than invalidating the agreement entirely. In cases in which a non-compete is perceived by the court as punitive, unduly restricting an employee from obtaining employment, the agreement will not be upheld.  A licensed attorney who specializes in employment law will be able to gauge the likelihood that a particular non-compete agreement will be enforceable.

The Law Office of Randall P. Brett assists employers and employees in navigating this important but difficult area of the law. Give us a call if you have questions about non-compete agreements or any other matter.


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