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A non-competition agreement is a written contract between an employer and an employee that restricts certain activities of the employee upon termination of employment. Due to the access to sensitive business information or trade secrets that an employee may have had, many employers attempt to control exposure or use of that information through a non-compete agreement.
Scope
An employee may be asked to sign a non-compete when first hired, during employment, or before leaving a position as part of a severance package. Often the employee will have some significant incentive to sign, such as the offer of employment, extension of a benefit, availability of a perk, or availability of severance benefits.
Regulatory citations
- None
Key definitions
- Classic non-compete agreement: Prohibits a former employee from working in competition with the employer, which could include self-employment.
- Non-solicitation agreement: Attempts to prevent the former employee from contacting or soliciting the employer’s existing customers or employees.
- Non-disclosure agreement: Helps protect an employer’s trade secrets, confidential business information, and proprietary information from disclosure by a former employee. They, like non-competes, must be carefully drawn, usually with the assistance of an attorney.
- Confidentiality agreement: Similar to non-disclosure agreements, except that the agreement requires that one or both parties must keep information confidential.
Summary of requirements
A non-compete agreement is a document, covenant, or a clause inserted within another document, prohibiting the signer from engaging in similar business activities as an employee, independent contractor, owner, or investor. Such agreements, clauses, or documents may also limit the signer from working in the same field within a given geographic area, or for a specific time period. They may be linked to a non-disclosure agreement which limits the disclosure of trade secrets.
Legality of non-compete agreements. There is currently no federal law regarding non-compete agreements. The legality of such agreements varies by state, and by the types of behavior, length of time, and geography that the agreement attempts to control. Although most states will enforce them if “reasonable” in terms of breadth and length of the restriction, the definition of reasonable varies.
In order to be enforceable, the company should draw the agreement to be consistent with the rules of the state where it will be utilized. Define as clearly as possible all legitimate interests the company is seeking to protect, whether this is the client list, formulations, or work processes.
Non-compete agreements and state law. Many state laws look unfavorably upon any attempt to keep a person from gainful employment or on agreements that unnecessarily restrict a person’s ability to earn a living. State laws on the use of non-compete agreements vary greatly.
Employers should consult state regulations, and a legal professional, before developing and using such an agreement.
Enforcing non-compete agreements. If a former employee’s conduct violates a non-compete agreement, the company can seek a court order to force the former employee to cease and desist and for damages. A judge may issue a preliminary injunction to prevent the former employee from engaging in those activities while the case is pending.
Getting a ruling in the company’s favor will depend upon the reasonableness of the non-compete agreement. A judge may find that the covenant covers too long a time period or too large a geographic area. In these cases, the judge may void the entire agreement, or enforce it to the extent reasonable depending upon the laws of the state.