By Julie Morris
In today?s competitive market a valid non-compete clause is a powerful tool. For sole proprietors to Fortune 500s and all variation of business in between, a non-compete agreement can provide great benefit in protecting trade secrets, business relationships, and customer data.
However, enforceability of a non-compete can be tricky, particularly if not carefully drafted. Courts are increasingly skeptical of agreements that limit entrepreneurship, an employee?s ability to find employment, or otherwise restrict post-employment activities.
A recent study commissioned by the Wall Street Journal showed that non-compete litigation is at an all-time high.? The number of lawsuits filed over non-competes increased by 61 percent between 2002 and 2012. Review of the case law indicates that courts are often reluctant to enforce non-compete covenants if they impose an unreasonable hardship on the ex-employee.? This means that non-competes are strictly scrutinized as to their “reasonableness” in light of the facts and circumstances presented in each case.
Business owners and employers considering relying on non-compete restrictive covenants within an agreement should keep the following in mind:
State Law Determines Enforceability: The enforceability of a non-compete restrictive covenant will be determined by state law. Understand that each state?s law can differ significantly with regard to enforceability — from requiring explicit language to be included in the contract to various other limitations.? Generally, the law in which the employee is located will apply.? This may be the case even when a contractual agreement contains a governing law provision.
Reasonableness is Key: Non-competes must be reasonable and realistic to be enforceable. Reasonableness is determined on a fact specific basis.? In evaluating reasonableness, courts often evaluate the geographic scope, duration, and type of activity the ex-employee is allegedly precluded from engaging in. Essentially, a non-compete can’t unduly burden the employee’s ability to earn a living in his or her field.
A Legitimate Business Interest Must Exist: The non-compete agreement must be tailored and cannot serve just any purpose. Reasonable non-compete restrictions protect an employer’s legitimate and critical business interests or proprietary trade secrets. As a general rule, the agreement’s scope, duration, and geographic area must be no larger than necessary to protect the employer’s legitimate business interests. Notably, preventing honest competition or punishing an ex-employee for quitting is not a legitimate business interest.
Consideration is Required: All binding contracts require consideration. A non-compete agreement is no different. This means the person signing the non-compete agreement must receive something in return — at the time of execution. Adequate consideration is dependent on the facts of each case and can vary greatly.
Smart Tip: Employers bear the burden of proving that non-compete agreements protect legitimate interests, trade secrets, or customer data and that the agreement is narrowly tailored. Precise and well-informed drafting is critical to ensure enforceability.