Non-Competes: Sword and Shield

Alan N. Walter –

Pondering Non-Competes
Pondering Non-Competes

Restrictive covenants – agreements not to do certain things – are common in employment agreements. The most common: non-disclosure, non-solicitation, and non-competition.

Let’s talk about non-competition agreements or non-competes. Companies often ask employees to sign non-competes. Their basic purpose is to protect the employer when (inevitably?) the employee moves on to other (greener?) pastures, by limiting the employee’s ability to compete with the company.

Non-competes are governed by state law. That is, each state gets to decide whether the contract terms of a non-compete (governed by its law) should be enforced. Some states are more favorable to companies; others to employees. Generally speaking, though, a non-compete will be enforced if it is (1) based upon valid consideration (see below), (2) necessary to protect the company’s interests, and (3) is reasonable in geographic area and duration.

[Digression: valid consideration, in most states, may be simply the employee getting a job.]

It’s imperative that a person who leaves a company either to join another company or start his own business review any employment agreement or non-competition agreement he has entered into. (And let’s keep in mind that an agreement doesn’t need to look like a contract to be binding. For example, an acceptance of an offer letter or an acknowledgment of a company policy manual can possibly bind an employee to a non-compete.) The non-compete, whether free standing or hidden in another document, may greatly restrict the ability of a person to perform in his new role.

On the other hand, the owner of a company may want his employees to enter into non-competes. In many cases this is an entirely appropriate way to preserve the company’s business from wandering ex-employees. However, the non-compete may not be proper or necessary for every employee. In addition, the non-compete may not be sufficient; it may need to be supplemented by a non-disclosure or non-solicitation agreement. And if a non-competition agreement is entered, a generic form will not necessarily be enough; the agreement needs to comply with the state law that governs it.

The usual remedy for breach of a non-compete is an injunction, a court order preventing the ex-employee from engaging in this new role. Sometimes, monetary damages are awarded in addition or instead.

Please let me know if you have any questions or comments.

– Alan N. Walter