A non-compete agreement (also referred to as a “do not compete,” a “covenant not to compete,” or a “no-compete clause”) is a contract by which one party (typically an employee) agrees not to compete with another party (typically the employer) for some specified period of time. A non-compete agreement may be created at any time during the employment relationship. If not signed prior to or on the first day of the employment relationship, some states require the employee to receive some “benefit” (such as a one-time cash payment, raise, or promotion) in exchange for signing the non-compete to make it enforceable.
Elements of a Non-Compete Agreement
A well drafted non-compete agreement contains three “elements.”
- Prohibited Activities: The most important component of a non-compete agreement is a description of the range of activities the employee is prohibited from engaging in or industries the employee agrees not to work in. This is the “prohibit conduct”.
- Geographic Limitation: The geographic limitation describes the locations or markets within which the employee agrees not to engage in the prohibited conduct. This is the “territory”.
- Duration: The duration of the prohibited activity within the territory may be stated in any measure of time, such as days, months or years.
Enforceability
The enforceability of non-compete agreements varies from state to state. A significant majority of states will enforce a non-compete agreement as long as it is not unreasonable. The reasonableness of a non-compete agreement is determined on a case-by-case basis. The most important considerations a judge will review are the scope of the limitation on the employee’s future employment and the interest the employer is seeking to protect.
Non-compete agreements that are “narrower,” are more likely to be upheld by a court than agreements with “broader” limitations. The provisions of a non-compete agreement are considered “narrow” if they prohibit only a limited range of activities or alternate forms of employment, cover a limited geography, and last for a short period of time.
Non-compete agreements that protect important business interests (such as trade secrets, proprietary technology, customer information, or confidential product information) are more likely to be enforced than agreements that merely punish employees for seeking alternative employment opportunities. In most states a narrow non-compete agreement that is designed to protect an important business interest will be consistently enforceable.
Although most states consider non-compete agreements enforceable, a few states have established extremely stringent requirements, making non-compete agreements significantly harder to enforce. In California, non-compete agreements are deemed unenforceable in all but a very limited number of situations. It is important to note that non-compete agreements are frequently governed by the law of the state in which the employee is located regardless of any provision in the non-compete agreement selecting another state’s laws.
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