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Non-Compete Agreements

Non-compete provisions in employment contracts are becoming more and more commonplace. And as their use increases, so too does the litigation about their validity.

In my estimation, there are three overriding policy interests present in the litigation over non-compete agreements. First, there is the interest in protecting an employer from having employees jump ship and immediately go to a rival company and spill the beans about how the employer operates its business and gets its competitive advantage. Second, there is a concern that there will be too much deference given to an employer’s interest, which would then mean that an employee could be forbidden from working in a particular industry or trade. Finally, there is the practical reality that the agreement between the employer and employee is a legally binding contract — and caution needs to be exercised by a Court before overturning contractual provisions mutually agreed upon by two parties.

Against the backdrop of these policy interests, non-compete agreements are valid only if they are carefully written and restricted because they are in effect restraints on trade and commerce (something we do not want to encourage in our market economy). At the core of non-compete law, then, a Court most often looks to whether an employer’s interest in protecting internal information/trade secrets/confidential information or vendors/customers is carefully restricted.

When is a non-compete clause “carefully restricted”? Well, there is no concrete answer to that. The answer turns on the specific facts of a given case, and is thus contextual. Once an employer shows the existence of a protected interest — that is, a trade secret or customers/vendors — then the non-compete agreement needs to be found to be reasonable both in the (1) length of the restriction and the (2) scope (i.e., geographic boundaries) of the restriction. To give an example, if I signed a non-compete clause with a watch company that said if I leave I cannot work for any other watch company in the U.S. for 15 years, then this provision would likely be struck down. Assuming the employer has a protected interest, 15 years is quite a long time to restrain an individual’s commercial activity. Similarly, suppose I sign a non-compete with a watch company that says after I leave I cannot work for any watch company for 2 years within a 5 mile radius of the company. Well, this would turn on context. How many watch stores are within a 5 mile radius? Is it  the case that every other watch store is within 5 miles and it is a de facto blanket prohibition on working for a watch store for 2 years? Or are there several closer?

Because of the inherent haziness and uncertainty around non-compete agreements, it is important to hire or consult with an attorney. The dispute centers squarely on the enforceability of the particular provision, and thus will call for the interpretation of contract law verbiage. Both sides have a lot at stake. An employer wants to protect its business from unfair competition by preventing its work product and trade secrets from getting out. An employee wants to be able to work for another company in the industry without being unduly hampered in his or her career choice.

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