Is Your Non-compete Agreement Enforceable?
by Heather Bussing
A Non-compete agreement is a contract between an employer and employee where the employee agrees not to work for competitors of the employer for a certain amount of time after the employee leaves.
Each state has its own unique laws and rules about whether, when and to what extent a non-compete agreement is enforceable. Usually the law where the employee works applies even if the company is located in another state where the agreements are enforceable. Recently Georgia, which had traditionally been hostile to enforcing non-compete agreements, enacted legislation that expressly permits the enforcement of noncompete agreements under fairly broad circumstances.
Anatomy of a Non-Compete Agreement
Non-compete agreements typically have two important parts: 1) protection of trade-secrets; 2) restrictions on where employees can work after they leave.
The trade secret protection is essentially a non-disclosure agreement and is designed to keep a company’s proprietary information secret. It usually covers company product information, sales strategy and client lists and contains a long list of other things that boil down to one of the above.
The work restrictions usually prevent an employee from working for a competitor in the same market or geographical area—usually for one or two years. These provisions are often drafted so broadly that the only place the employee could ever work would be a research substation in Antarctica teaching polar bears to surf.
Non-Compete Agreements Are Often Restricted or Unenforceable
Because non-compete agreements are so restrictive, they are often restricted or not enforceable. In California, non-competes are effectively illegal unless you are selling a business. Other states will enforce some provisions, usually the trade secret protection, but not the work restrictions.
The first thing to look at is whether there was some form of payment or consideration for the non-compete agreement. When the agreement is signed at the beginning of employment, courts will usually interpret the NCA to be part of the overall employment deal and find that there was some fair exchange for the agreement. But when an employer asks an employee to sign a non-compete agreement after starting employment and there is no extra payment or benefit to the employee for signing it, then almost all courts will invalidate the agreement for lack of consideration.
The next thing to consider is the laws of the states involved—where the employer is headquartered and where the employee will physically be working. If either has restrictions against enforcing NCAs, then the agreement may not be effective.
About one-third of states have some restriction on the enforceability of non-compete agreements because they interfere with a person’s basic ability to work and make a living. The restrictions usually limit the geographical area where the employee cannot work for a competitor and limit the time of the non-compete to less than two years. The employer has the burden of showing that any restriction is reasonable and necessary to protect against unfair competition. California, Louisiana, Alabama, Florida, Oregon and Michigan have the most restrictions against non-compete agreements. Other states, like Texas, will enforce the agreement but the courts often re-write non-compete provisions to the restrictions the employer can prove are necessary to preventing an unfair advantage by the new employer.
In California, non-compete agreements are illegal and unenforceable except in very limited situations. California will recognize an employer’s right to protect trade secrets, but only if the employer can show that the information really is proprietary and should be kept secret—not just because the employer says it is. Even client lists are not secret if the information can be obtained in other ways besides the employer’s internal lists.
In addition, employers who have fired employees working in California for refusing to sign a non-compete agreement have been liable to the employee for wrongful termination and have also been liable for damages for unfair trade practices for trying to enforce a non-compete agreement in bad faith.
So before you require employees to sign a non-compete agreement, make sure the agreement is valid under the law where the employee works.