Non-Compete Agreements With Employees

First published by Practical Law The Journal, January 2012

This Practice Note from our website provides an overview of non-compete agreements between employers and employees. This Note contains general information that is not jurisdiction-specific. For information on state law requirements, see the State Q&A Tools on practicallaw.com.

A non-compete agreement (also known as a non-competition agreement or a non-compete) is an agreement between an employer and an employee that imposes professional restrictions on the employee after the work relationship ends. Non-competes restrict former employees from working for competitors or defined groups of competitors for a specified period of time. Employers use non-competes to protect their valuable corporate assets, such as trade secrets and goodwill.

This Practice Note provides a broad overview of non-compete agreements. In particular, it considers:

The benefits and limitations of non-competes. Key issues to assess when drafting a non-compete. Plans and procedures when seeking to enforce a non-compete. Available legal protection as an alternative to, or in the absence of, a non-compete. BENEFITS TO EMPLOYERS

Non-compete agreements benefit employers by providing them with greater assurance that the company's intellectual property, confidential resources and proprietary information will not be made available to or used by a competitor. Although confidentiality agreements and state common law also provide protections for intellectual property, those mechanisms do not prohibit former employees from working for competitors.

Non-competes are particularly useful to employers in cases where an employee has important confidential information or trade secrets. Although most employees have some important company knowledge, it is rare for more than a few employees to have information that, if disclosed, could jeopardize a company's business. Employers should identify employees in this high risk subset and enter into effective and enforceable non-competes with them.

LIMITATIONS ON ENFORCEABILITY

Not all non-compete agreements are enforceable. Enforceability is a question of state law and may vary among states and industries. Courts in most states recognize that non-competeslimit an individual's ability to make a living and will notenforce non-competes that restrict employees beyond what is reasonably required to defend a legitimate business interest.In other states, however, post-employment non-compete agreements are generally void unless they fall under a narrow statutory exception.

JURISDICTION-SPECIFIC LIMITATIONS

In certain jurisdictions, non-compete agreements are entirely or largely unenforceable, regardless of the impact that competition may have on an employer's business. For example, in California, employee non-compete agreements restricting post-employment conduct are unenforceable. However, non-competes are enforceable in California when they arise in the context of the sale or dissolution of a business. California employers can also still use other means to protect trade secrets and other information, for example, by using confidentiality and non-disclosure agreements (see below Alternatives to Non-compete Agreements).

INDUSTRY-SPECIFIC LIMITATIONS

Non-compete agreements may not be appropriate or enforceable in all industries. For example, non-competes are generally not enforceable against attorneys because of ethical prohibitions on preventing clients from retaining the attorney of their choice. There are limited exceptions. For instance, Ohio authorizes narrow restrictions on the practice of law for retiring attorneys.

Many states also limit the enforceability of non-competes in the medical profession. In Texas, for example, non-competes with physicians are only enforceable if they meet certain conditions that are not generally required of non-competes. Among other things, the agreement must:

Provide the physician with access to certain patient lists and medical records. Allow for a buy-out of the non-compete at a reasonable price. Colorado similarly restricts the enforceability of non-competes in the medical profession.

In states where there is no statutory framework for non-competes, courts have refused to enforce physician non-competes where doing so would harm the public. This is not true in all states. Illinois courts, for instance, do not analyze physician non-competes differently from those involving other professions and industries (other than the legal profession).

DRAFTING A NON-COMPETE AGREEMENT

To be enforceable, a non-compete agreement must satisfy the requirements of contract law and state law specific to non-competes.

CONTRACT LAW REQUIREMENTS

Non-compete agreements must be supported by adequate consideration. This means that the employer must provide the employee with something of value (or suffer a detriment) in return for the employee's promise not to compete with the employer. The question of what consideration will support a non-compete is a recurring and problematic one, particularly when:

The employment relationship is at-will. The non-compete is signed during the employment relationship, rather than before the employee begins working for the employer. Offer of At-will Employment as Consideration

At-will employment can be terminated by the employer or employee at any time, for any lawful reason. In most jurisdictions, the offer of at-will employment will alone be adequate consideration for a non-compete if the non-compete was entered into at the beginning of the employment relationship.

However, in some jurisdictions, an offer of at-will employment is not sufficient consideration. For example, in Texas, the consideration provided by the employer to the employee must be something that gives rise to the public policy justification for enforcing non-competes. In other words, because the enforcement of non-competes is acceptable only when needed to protect an employer's legitimate business interests, the consideration furnished by the employer for the non-compete must be connected to those interests. Examples include a promise to provide an employee with confidential information or highly specialized training, both...