When Are Non-Compete Agreements Enforceable?
Non-competition, or non-compete, agreements are becoming more popular as industry becomes more paranoid about protecting trade secrets and customer lists. For many white-collar professionals and office workers, signing one is a condition of new or continued employment.
This places employees in a high-pressure situation where they can lose a job but also compromise their ability to make a living later. If you find that your industry uses non-compete agreements often or you are currently being pressured to sign one, this overview can help you ask the right questions and gain a better understanding of the effects these can have on your career.
What are non-compete agreements?
A non-compete agreement is a contract signed between a company and an employee indicating that the individual will not work for a competitor if his or her employment terminates. For example, the athletic apparel designer, Nike, may have a non-compete agreement preventing current or new employees from working for Adidas or New Balance in the six to 12 months after their termination or resignation.
Failure to follow those provisions exposes the former employee to liability. The employer can allege breach of contract at a minimum and request damages on that theory. It can also allege the former employee breach a trade secret and pursue economic damages. While proving damages can be difficult for an employer, a former employee can still incur considerable cost from merely defending such a lawsuit.
Why do employers require them?
The goal is to protect sensitive business information that is not generally known by the public or the competition. Trade secrets describe patterns, formulas, programs, techniques or devices that offer a competitive advantage. In theory, an employee with access to this information can leave for another company, divulge the information, and give that company a benefit that it did not earn but will now use to crush the former employee. By stating that employees cannot work for these entities, it minimizes this risk.
Non-compete agreements may also address customer lists as well as trade secrets, so former employees do not pass them to new employers or, if they decide to freelance, steal those customers for their own ventures. By arranging for a non-compete agreement, such exploits are actionable against the offending former employee.
What elements are present in enforceable non-compete agreements?
Courts will give non-compete agreements thorough scrutiny. If an agreement is overbroad, covers a long period of time or an unlimited geographic area, it is unlikely to be enforceable if a lawsuit ensues.
Legal requirements if these contracts are to be enforceable include:
- Employee receives something of value. This can be a job if the agreement is signed at the start of employment. If it is signed at termination, a severance package or other compensation is required.
- Protect a legitimate business interest. The agreement cannot exist simply to punish an employee for leave the company. Employers must prove trade secrets and confidential information are valuable capital requiring protection.
- Be reasonable. Limits imposed on employees in the non-compete agreement need to protect a business interest without hamstringing the former employee. An agreement that covers a 150-mile radius, lasts 10 years, and applies broadly to several business areas is unlikely to be held as reasonable.
Courts consider all these requirements but case law places reasonableness as the most important factor. Non-compete agreements should not apply to areas where the company does not do business and their duration should be no longer than the time a trade secret or confidential information is valuable. That is decided on a case-by-case basis.
Should you sign one?
There is considerable risk for employees who sign a non-compete agreement. Being held to the agreement can make moving on difficult if you are facing poor treatment or low pay. However, in an economy where jobs are few and far between, it is difficult to say no and easy to sign any agreement a potential employer puts in front of you.
If a new or current job is requiring a non-compete agreement, evaluate it for the following:
- Geography: Where does this agreement apply? Can you work for a competitor outside a 10-mile radius? A five mile one? If the agreement does not define a geographic radius, ask about it and do not sign the agreement until it is revised to include that specific detail.
- Applicable companies: Who does the employer consider a competitor? Specific names are preferable here as not all companies in your employer’s industry may be considered competitors. Again, if this looks overly broad, renegotiate.
- Duration. Never sign an agreement without a specific time limitation. The same goes for a very long one: if you are looking at a 10-year ban on working for your competitors, reconsider the position. Most agreements should not be in duration for more than one year and some talent recruiters advise against a span longer than six months.
Finally, never sign a non-compete agreement if an employer avoids answering your questions or refuses to make revisions for more specificity. Always feel free to ask for more time to consider it and do not give in to pressure as this can affect your future and job prospects for a long while.
Have you been presented with a worrisome non-compete agreement? Arrange for a free phone consultation by calling John J. Zidziunas & Associates at (973) 509-8500 and receive the guidance you need for an informed decision.
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