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Legal Tip of The Month

Non-Competition Agreements

 

Non-competition agreements are common in business.  Businesses often ask or require key employees to agree not to work for a competitor for a specified period of time after leaving the company.  This is done for several reasons; for example, to keep important employees from leaving the company or to prevent former employees from using confidential information obtained at their previous job at any new job.  Such confidential information can include customer lists, manufacturing processes, trade secrets and other proprietary information.

 

Non-competition agreements can be binding and useful to businesses.  However, courts have historically disliked them.  Some courts will not enforce an agreement that limits a person’s right to make a living or that violates antitrust laws by unreasonably restraining competition.  A court can completely refuse to enforce an agreement or the court may limit the scope or duration of the agreement and enforce it as revised.

 

Generally, a non-competition agreement will be enforced if it follows these guidelines:

· the agreement is narrowly written to protect legitimate interests of the business;

· the agreement limits the duration of the restriction to the time needed to prevent serious injury from competitive activity;

· the agreement limits the scope of the activities restricted to those matters that will truly cause injury;

· the agreement limits the geographic scope to a reasonably small, well-defined territory, usually not larger than the area where the company actually conducts its business; and

· the agreement leaves the restricted party with a wide range of other ways to earn a living and do business.

 

As with any contract, there must be “consideration” for the non-compete agreement, providing a benefit for the employee’s promise not to compete with your business.  For new employees, the benefit can be the job offer itself.  For an existing employee, it may be harder to provide a benefit, but the business can consider offering an additional payment or a promotion.  Furthermore, the company should ensure the employee is well aware of what he or she is signing.  Following these guidelines can help in the event an employee tries to invalidate the non-compete agreement at a later date.

 

Non-competition agreements can be valuable to a business to help encourage key employees to stay and to prevent confidential information from being used by a competitor.  Because these types of agreements are so unpredictable and technical, professional assistance is essential when preparing a non-competition agreement.

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