non compete agreement featured image

What Is a Non Compete Agreement and Is It Enforceable?

Legal Assistant Business Law, Resources

A non compete agreement serves one primary purpose – to prevent any employee who leaves your company from divulging confidential business information to the competition.

These types of agreements are generally issued to business executives, officials, partners, or any other company employee who is privy to trade secrets and other sensitive information that they are supposed to protect.

You can think of it as a kind of restrictive covenant – a promise, if you will – made by an employee to not work for a competing organization in a specific geographical region for a stipulated period following their exit from the company.

This article explores everything you need to know about non-compete agreements and whether or not they are enforceable.

What Is a Non Compete Agreement?

It is a legally binding agreement between an employee and their former employer that exists to prevent unfair competition if the ex-employee were to join a competing organization. The agreement remains in force for a specific period after the employment relationship is terminated.

In the agreement, the employee in question essentially promises not to work for a competing business within a specific region for a prescribed period following the termination of their employment in the organization they were working in.

Employers use non compete contracts as a security measure to ensure that sensitive company information doesn’t fall into the hands of their competition, that they would otherwise use to gain an unfair advantage over them.

It also prevents exiting employees from “misappropriating goodwill.” This means stealing the existing good relationship the company enjoys with its customers or suppliers. Non competes should also not be so prohibitive that they deny former employees a chance to make a decent living once they leave their respective companies.

How Do Non Competes Work?

Non competes stipulate the type of activity an ex-employee cannot engage in, as well as the geographical scope and duration that the contract will be in force.

signing contract image

A news correspondent, for instance, working at a television network, may be required to sign a non compete agreement after termination or upon their employment prohibiting them from working in other local news networks, for a specific time following their exit from the station.

The period in question could range anywhere between a couple of months to a maximum of two years.

So, based on that brief overview of how non competes work, the question is – Are non competes enforceable and, to what extent? The answer to this question isn’t so straightforward. Its enforceability all boils down to whether the agreement is “reasonable”.

What Makes Non Compete Agreements “Reasonable”

One thing you need to keep in mind when considering the enforceability of non-competes is the State you live in. Each state has its laws regarding what constitutes a “reasonable” agreement.

Generally, non-competes are enforceable if they:

  1. Come with reasonable time restrictions. In most cases, this is generally not more than a year.
  1. Have a limited geographical scope, as opposed to entire states. The contracts should specify specific cities or counties the ex-employee can’t work in once they leave.
  1. Are considered necessary to safeguard certain interests of the former employer, including but not limited to, confidential business information, trade secrets, and protecting the company’s existing relationship with its customers and vendors. This includes its reputation and current market position.
  1. Are supported by a tangible benefit – also referred to as “consideration” – in exchange for their promise not to work for a competing employer. Consideration in this instance could be in the form of lucrative stock options, additional monetary compensation, or the acceleration of the benefits they’re entitled to receive.
  1. Are industry-specific meaning that the restrictions placed on their activities once they exit are limited to the specific industry their former employer operates in. A newspaper writer, for instance, may get barred from working at another local newspaper agency, but not from writing a novel, although both activities make use of the same set of skills.

Example

A non compete clause example that would be considered enforceable can read something like:

“… The Writer, therefore, agrees that during the period they are in employment at ABC news agency, and for a further period of one year after the termination of their employment contract, he/she will not directly or indirectly engage in any business with, render services for, consult with, or participate in activities with any entity that is in competition for the same customer or subscriber base as company ABC …”

Non Solicit Non Compete

A non solicit is generally less restrictive and easier to enforce than a non compete. It is designed to protect the time and money you’ve invested in developing the relationship that your customers have with your brand.

By signing a non compete, a former employee is barred from joining a company that is in direct competition with yours. By signing a non solicit, on the other hand, they essentially agree not to solicit any of your company’s prospective or existing customers.

Although they are easier to enforce, the burden of proof for non solicits is often higher compared to what’s required for non competes. You would have to show that your former employee solicited a customer – existing or prospective – to whom the non solicit applied.

How to Get Out of a Non Compete Agreement

If you are a former employee who signed a non compete agreement with your former employer, breaching its terms carries with it some pretty serious legal ramifications. Violating non compete agreements that are legally valid and enforceable under your State’s law paves the way for your former employer to sue you.

If that happens, you may end up paying a significant amount of money in damages to them if you lose the suit. On the other hand, it all depends on whether or not your former employer wants to enforce the agreement and take legal action against you for violating the terms. If they don’t, then you can thank your lucky stars.

The only way to get out of a non compete agreement would be to:

  1. Prove that your adherence to the contract does not in any way promote your former employer’s business interests
  1. Prove that they are in breach of the contract by failing to fulfill certain conditions like monetary compensation or benefits
  1. Prove that the contract is not enforceable as per your State’s laws
  1. Prove that your former employer’s proprietary or confidential information is widely available
  1. Prove that the terms of the non-compete are not in the public interest

Look Before You Leap

Before you get swept up in the excitement and promise of a new job and end up signing a non compete agreement, ensure that you fully understand what you’re getting into.

It may not seem like a big deal at that moment, but it could greatly hinder your ability to make a smooth transition into a new job. It’s always a good idea to have a lawyer look at it and find the best possible way to mitigate its effects once you leave the company.

On the other hand, if you’re a business owner, having a solid and enforceable non compete could be the difference between the success and fall of your company every time your employees leave. Talk to an experienced attorney to see how best to draw up a contract that protects your business’ interests.