Overview of U.S. Non-competition Agreements
A non-competition agreement, also know as a covenant not to compete, is a promise by an employee not to compete with his or her employer for a specified time, in a particular place or in a particular way. A non-competition agreement may be a clause in an employment agreement or a separate contract standing by itself.
Enforcement of Non-competition Agreements
As a general rule, courts will enforce non-competition agreements, within limits. California is an exception to this rule, where state law prohibits covenants not to compete except in narrow circumstances, such as in connection with the sale of a business. The balance of this article addresses non-competition law as it is found outside of California.
Courts once did not enforce non competition agreements, viewing them as unlawful restraints on competition. Today, however, courts will enforce non-competition agreements if:
- the employer proves that it has a legitimate business interest to protect by restricting its employees' right to compete against it;
- the restriction on the employee's right to compete is no greater than that necessary to protect the employer's business interest; and
- the covenant not to compete is supported by consideration, meaning that the employee received something in exchange for it.
The Employer's legitimate business interest
An employer has a legitimate interest in preventing an employee from taking advantage of relationships, information or skills acquired as a result of his or her employment. If an employer gives a new employee its customer list, for example, most courts will enforce an agreement that prevents the employee from contacting those customers on behalf of a competing business.
As another example, an employer can protect its investment in training an employee by preventing the employee from taking the knowledge acquired on the job to compete against the employer.
The Employee's Interest in Making a Living
If the employer's restriction against competition prevents an employee from working anywhere for anyone, it is probably too broad. Few employers will be able to convince a court that their business interest is important enough to prevent an employee from working for anyone else.
Negotiating a Non-competition Agreement
The employer has the most leverage in a non-competition agreement negotiation, especially if state law permits the employer to terminate an employee who refuses to sign the agreement. In Ohio, for example, an employer may lawfully terminate an employee who refuses to sign a non-competition agreement. Further, Courts will enforce that agreement, even though signed the employee under circumstances where he or she had little choice but to sign.
An employee asked to sign a non-competition agreement should, if possible, just say no. The employer may not be willing to lose a valuable employee and may abandon its effort to force that employee to sign a non-competition agreement.
For the employee who is not in a position to refuse to sign the non-competition agreement, he or she should ask to limit the agreement to that which is necessary to protect the employer. Further, if the non-competition agreement would prevent the employee from working for a period of time in a highly specialized industry or occupation, the employee should ask for severance payment in the event of an involuntary termination that is not for cause.
If a non-competition agreement is written to protect the employer's legitimate business interest and the employee can still make a living doing something, somewhere, courts will probably enforce it. The time to negotiate a non-competition agreement is thus at the start of employment, not at the end. Otherwise, the former employer can block the employee's next career move.
The law of non-competition agreements tries balance restrictions on the employee's freedom to compete just enough to enable the employer to protect its business interest. Most states direct courts to redraw, or "blue pencil," non-competition agreements so that they are no broader than what is necessary or lawful. Therefore, if the non-competition agreement is broader than that necessary to protect the employer's legitimate interest, a court is likely to narrow the restrictions on the employee's ability to compete. However, as long as the employer proves that it has some legitimate business interest at stake, a court is likely to restrict the employee, at least to some extent.
Employer Remedies for Violation of a Non-compete
An employer can file suit against an employee suspected of violating a non-competition agreement. The employer can ask the Court for an immediate injunction, known as a temporary restraining order, as well as a preliminary and permanent injunction. The restraining order and injunction are court orders. If the employee violates the court order, the employee can be found in contempt of court and forced to pay contempt penalty and even risk incarceration, if the violation is ongoing.
The employer can also recover money damages. If the employer can point to a facially valid agreement and reasonable restrictions, most courts will consider an award of lost profits, if provable. Finally, most states will toll, or stop, the running of the non-competition agreement for the time that the employee violates it. Thus, if an employee caught competing against his or her former employer has been doing so for a year, the court may add another year to the otherwise reasonable duration of the non-competition agreement.
Another employer tactic for stopping an suspected violation of a non-competition agreement is to threaten the new employer with a lawsuit for "tortious interference." If your non-competition agreement is valid, then a third party who induces the employee to breach the agreement between the employee and employer could face the same liability as the employee, and possibly more. To avoid this liability, the new employer will often terminate the new employee, which it is free to do.
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