Non-compete and Non-competition FAQs
By Michael L. Fortney
Contents
- Introduction to non-competition agreement FAQs
- What is a Covenant not to Compete?
- Are Non-Competition Agreements Enforceable?
- What are some examples of an employer's legitimate business interest?
- What if the non-competition agreement prevents the employee from obtaining work anywhere else?
- I want my employees to sign non-competition agreements. What can I ask for?
- What if my employees refuse to sign a covenant not to compete. Can I terminate their Employment?
- I want my Employees to sign non-competition agreements after they started my employment. Will they be valid?
- My employee signed a Non-compete but has now gone into Business for Himself. Can he do that?
- What if the non-compete is too broad? Can the employee get out of it?
- What can an Employer do to Prevent a Former Employee from Breaching a Non-competition agreement?
- How do I learn more about non-competition agreements in employment?
Introduction to non-competition agreement FAQs
Today more employers than ever require employees to agree not to compete against them after their employment ends. Employers can protect their interests in protecting their trade secret information and preventing employees from engaging in unfair competition against them. Employees, however, may find a promising career path blocked by an agreement that meant little to them when they signed it. In Ohio and every other states except California, courts will, to some extent, enforce contracts by employees not to compete against their former employer.
Fortney & Klingshirn provides answers to frequently asked questions about covenants not to compete to help you evaluate your options. These answers are not a substitute for legal advise. You must consult counsel licensed to practice in your state before signing or negotiating a covenant not to compete.
What is a Covenant not to Compete?
A covenant not to compete, which is also known as a non-competition agreement or a non-compete, is a promise by an employee not to compete with his or her employer for a specified time in a particular place. A covenant not to compete may be a clause in an employment agreement or a separate contract standing by itself.
Agreements that prevent employees from competing against their employer while still employed are upheld in every state. Most states also provide employers with a remedy to recover profits lost as a result of the "faithless employee" who breaches a fiduciary duty owed to the employer by competing against it, while employed, whether or not the employee had agreed not to compete against the employer.
Agreements that prevent employees from competing against a former employer once the employment ends, however, must pass state law tests for reasonableness. One state, California, generally bans non-competition agreements altogether, with exceptions allowed in for the sale of a business or ownership interest in a business and for the protection of trade secrets.
Are Non-Competition Agreements Enforceable?
Generally speaking, yes. California, Alabama and Florida each enacted statutory restrictions on non-competition agreements, each of which has their exceptions. In states that have not enacted non-competition legislation, courts have limited the restrictions that employers can place on their employees' ability to make a living once their employment ends. As a general rule, courts will enforce non-competition agreements if:
- the covenant not to compete is supported by consideration, meaning that the employee received something in exchange for it.
- the employer proves that it has a legitimate business interest to protect by restricting its employees' right to compete against it;
- the restriction on the employee's right to compete is no greater than that necessary to protect the employer's business interest;
- the restriction does not place an undue burden on the employee's ability to make a living; and
- the restriction is not injurious to the public.
What are some examples of an employer's legitimate business interest?
Every state recognizes an employer's interest in protecting its trade secrets. Even California, which does not enforce contracts that restrict an employee's ability to engage in a trade, allows employers to go to court to prevent former employees from using the trade secrets that employees obtained during the employment.
In addition, most states recognize that an employer has a legitimate interest in preventing an employee from taking advantage of relationships or information acquired as a result of his or her employment. For example, an employer can protect its investment in training an employee by preventing the employee from taking the knowledge acquired on the job to compete against the employer.
What if the non-competition agreement prevents the employee from obtaining work anywhere else?
If the employer's restriction against competition prevents an employee from working anywhere for anyone, it is probably too broad. Few employers will be able to convince a court that their business interest is important enough to prevent an employee from working for anyone else.
I want my employees to sign non-competition agreements. What can I ask for?
An employer can ask its employees to refrain from competing against them for a reasonable amount of time within a reasonable geographic area or with respect to specific customers, but only to the extent necessary to protect the employer's legitimate business interests. An employer can also require the employee to agree not to solicit or raid its employees or interfere with its vendor relationships, again, to the extent necessary to protect its business interests.
What if my employees refuse to sign a covenant not to compete. Can I terminate their Employment?
Yes, unless the non-competition agreement violates the public policy of the state. Thus, an employer cannot terminate an employee in California for refusing to sign a non-competition agreement, since employee non-competition agreements are against California public policy. Outside of California, however, employers are generally free to terminate employees who refuse to sign a reasonable non-competition agreement.
Since terminating an employee for refusing to sign a non-competition agreement is a gray and evolving area, employers should consult qualified legal counsel in their state before making such terminations.
I want my Employees to sign non-competition agreements after they started my employment. Will they be valid?
Maybe. An employer must give an employee some "consideration," or a thing of value, before courts will recognize a valid contract. However, most states require very little consideration and may treat an additional day of employment for an otherwise at-will employee as sufficient consideration for a valid non-competition agreement. Again, consult your employment lawyer for specific guidance on this subject.
My employee signed a Non-compete but has now gone into Business for Himself. Can he do that?
No, so long as the non-competition agreement is valid, as discussed above, and not overly restrictive. The law of non-competition agreements tries to restrict the employee's freedom to compete just enough to enable the employer to protect its business interest. If the employee tries to take unfair advantage of an employer's training or investment, a court will likely allow the employer to protect that training or investment.
What if the non-compete is too broad? Can the employee get out of it?
Not necessarily. In Ohio and most other states, courts have the right to redraw non-competition agreements so that they are no broader than is necessary to protect the employer's legitimate interests. Therefore, unless the employer fails to prove the existence of any legitimate business interest, the court will likely restrict the employee at least to some extent. If the court is unable to draw reasonable limits, however, it may have the discretion not to enforce the agreement at all.
What can an Employer do to Prevent a Former Employee from Breaching a Non-competition agreement?
An employer can file suit against for breach of contract and recover the losses caused by the employee's breach of a non-competition agreement. In addition, the employer can ask the Court for an injunction. If the employer can point to a facially valid agreement and reasonable restrictions, most courts will grant an injunction while the lawsuit is pending. Finally the court may extend the non-competition period upon finding a breach.
How do I learn more about non-competition agreements in employment?
You can contact us with a specific question. In addition, Fortney & Klingshirn has written extensively about non-competition agreements on My Employment Lawyer, a service of Fortney & Klingshirn.
