Guidelines for Non-Compete Agreements

Employers often use non-compete agreements to restrict employees from working for competitors and to protect proprietary business information. However, given today’s uncertain economic environment, courts are more reluctant to enforce agreements that place unreasonable restrictions on an employee’s ability to seek and maintain gainful employment.  As such, in order to increase the likelihood that a court will enforce a non-compete agreement, the agreement should be narrowly drafted to comply with state law.

In general, employers should follow these guidelines with regard to non-compete agreements:

  • The employer should have a legitimate business interest to protect – If an employee will have access to sensitive business information, trade secrets, or other business information that is not generally known and cannot be readily learned by other people who could benefit from it, the employer has a legitimate interest in preventing the employee from disclosing that information to competitors. Employers also have a legitimate business interest in protecting the goodwill developed through customer relations.
  • Consider your goals – Employers should refrain from a blanket requirement that all employees sign a non-compete agreement. In general, only employees who will have access to sensitive information or substantive interaction with clients should be subject to non-compete agreements.  For example, a non-compete agreement might be appropriate for your sales staff, but not for your receptionist.
  • The agreement should be supported by sufficient consideration – Requiring new-hires to sign reasonable non-compete agreements in exchange for a position is sufficient consideration in most states. However, in most states, requiring current employees to sign a non-compete agreement merely to maintain their employment is generally insufficient.  Employers should typically provide an existing employee with an added benefit, such as a promotion or a raise, before requiring the employee to sign a non-compete agreement.  Likewise, non-compete agreements may be included in severance agreements in exchange for payment of a monetary sum or other severance benefit that the employee would not otherwise have been entitled to.
  • Avoid overreaching – a non-compete agreement should be reasonable in scope and duration, i.e. it should not last too long, cover too wide of a geographic territory, or broadly prohibit a former employee from engaging in too many types of activities. Generally, non-compete agreements of up to two years will receive less scrutiny than those of longer duration.  Non-compete agreements should be narrowly tailored to the employee’s specific job duties and responsibilities performed during the employee’s employment.  In addition, although some states allow employers to restrict employees’ activities in areas where the employer conducts business, it is more prudent to limit a non-compete agreement to locations where the employee actually performed work for the employer.
  • Consider termination reasons when attempting to enforce a noncompete agreement – If the employee was terminated for good cause or voluntarily left employment, the non-compete is likely to be enforceable. However, if the employee is terminated for reasons other than good cause, or in connection with a lay-off, a court may be reluctant to enforce the non-compete agreement.
  • Assess state law limitations – In some states, courts will deem an entire agreement void if any part of the non-compete agreement is unreasonable. Other courts will simply strike, or blue-pencil, the offending provision and enforce the remainder of the agreement.  It is particularly important to ascertain which approach your state uses in cases where non-solicitation, non-disclosure, and other restrictive covenants are included in one document with the non-compete agreement.  Some states also have very strict rules with regard to the use of non-compete agreements in general.  However, in such states, use of a non-solicitation or non-disclosure agreement may be permissible and sufficient to protect confidential employer information.