Non-Compete Agreements – Top 10 Questions
In this article, we’ll discuss 10 of the most common questions associated with non-compete agreements. Employers often require their employees (especially higher-end employees) to sign non-compete agreements or covenant (i.e. promise) not to compete clauses. In other words, non-compete agreements and covenants not to compete cover the same information (they can come as separate agreement or as a clause in a contract – so make sure to read your contracts). Obviously, we can only touch upon a brief amount of information, but these questions should give you at least a good general understanding of some non-compete issues.
Next, we’ll go over non-compete agreement questions 1 through 3.
Questions 1 – 3
Question 1 – What is a non-compete agreement?
In short, a non-compete agreement is a contract between an employer and his or her employee where the employee promises to refrain from competing with that employer’s business. Provisions in a non-compete agreement generally include 3 main areas: (i) time, (ii) geographic location, and (iii) purpose.
Question 2 – Are non-compete agreements enforceable?
This is a common question. Often, individuals who sign outrageous non-compete agreements believe that the whole agreement is unenforceable. Sometimes this is true, but often it is not! Most courts will simply invalidate the parts in the non-compete agreement that are illegal and enforce the other provisions of the contract.
Question 3 – What is important in determining if the non-compete agreement will be enforceable?
A court will generally look at 3 main areas of the non-compete agreement (see Question 1), AND take into account the following 3 factors:
- there is consideration
the employer has a legitimate business interest to refrain the employee from competing with it
- this is 1 of the 3 main elements required for creation of a contract (the other being (i) an offer and (ii) acceptance)
- this means that the employee must receive something for giving up the right to compete with the employer
the restriction on the employee’s right to compete is not overbroad
- this is generally fairly easy for most employers to show
- an employer usually just has to show that it would be harmed if the employee competed with it, such as using the employer’s customer lists, information, skills, etc.
- this is likely the main factor the court must evaluate in its balancing test
- the employer must not go too far in this element (e.g. try to restrict the employee from engaging in any kind of work)
What does all this mean? Well, it means that each non-compete agreement is often very fact specific, depending on the time, location, and industry involved, the relationship of the employer and employee, etc. It is a balancing test. That’s why it’s often a good idea to find a lawyer with experience in dealing with non-compete agreements.
Next, we’ll go over non-compete agreement questions 4 through 6.
Questions 4 – 6
Question 4 – What if the non-compete agreement prevents me from working for anyone?
If the non-compete agreement prevents you from working for anyone, anywhere, for a very long time (e.g. 5, 10, 20 years, etc.), it’s likely that the entire non-compete agreement would be invalidated. However, most non-compete agreements are not this broad. Most employers are not this naïve. So, a one year time limitation will likely be enforceable.
Question 5 – Are there different types of non-compete agreements?
Yes. Non-compete agreement can be separate, stand alone agreements signed between an employer and employee. On the other hand, the language from a non-compete agreement can simply be added to an employee contract. Whether the non-compete agreement is a separate contract or a clause in another contract, it will still have the same legal effect.
With that said, non-compete agreements come in 2 main different situations which can have a large legal difference. Non-compete agreements can be (i) signed by an employee with an employer or (ii) for the sale of a business. This article focuses on non-compete agreements in the employee-employer context (e.g. number (i)). If you sign a non-compete agreement for the sale or exchange of a business, a court is often more willing to enforce stricter provisions.
What does this mean? Well, if you sign a non-compete as an employee to refrain from competing with your former employer for 5 years it likely will not be enforceable because 5 years is generally too long. However, if you sign a non-compete agreement to last for 5 years as part of selling your business, it likely will be enforceable. Why? Because courts generally hold business owners to a higher standard and assume that business owners have more freedom to contract.
Question 6 – I signed a non-compete agreement after I started working. Is this non-compete agreement enforceable?
It depends. Whether or not the non-compete agreement is enforceable depends on the state in which you work, where you signed the non-compete agreement. The main issue here is whether you, as the employee, received any form of consideration for the non-compete agreement from your employer.
Some courts hold that consideration is satisfied just because you want to keep your employment, i.e. you will continue to make money as an employee. Other courts say that the employee must actually receive some form of additional consideration above and beyond continued employment, such as money, new benefits, etc.
Bottom line – check your local state laws.
Next, we’ll go over non-compete agreement questions 7 to 9.
Questions 7 – 9
Question 7 – How can I get "out" of a non-compete agreement?
If you signed a legal and enforceable non-compete agreement, you are bound by the terms of the non-compete agreement. To many people, this may come as a surprise. They simply think they can just get out of the agreement. Well, it doesn’t work like that. However, you do have options (as like most things with the law).
You could offer to pay the employer or come to some other kind of agreement with the employer so you can do what you want to do. You’ll want to get the employer to sign a release of your non-compete agreement, along with the consideration that you’re giving the employer for the release of your non-compete agreement.
In short, make sure you fully understand the terms of the non-compete agreement before you sign it! And read legal articles like this to stay informed about your legal rights and responsibilities.
Question 8 – What would happen to me if I violated the non-compete agreement?
Maybe nothing, as long as your employer does not want to enforce the non-compete agreement. But you’d be lucky if that were the case. It is more likely that your employer will either file a lawsuit against you to enforce the non-compete agreement for an injunction (i.e. decree to the court to refrain you from violating the non-compete agreement) and/or money damages.
As long as the employer can show valid reasons for the non-compete agreement and your signature on the non-compete agreement, you will likely be fighting an up-hill battle. You’ll likely have to hire an attorney and pay a decent amount of legal fees to fight your former employer in court. And if the non-compete is valid and you clearly violated it, you’ll likely lose your fight and may even owe the employer its legal fees.
Additionally, the employer could file a tortious interference action against the employer that you’re now working for in violation of your non-compete agreement. In this respect, your new employer will be in violation of the non-compete agreement. If your former employer does this, your new employer will likely terminate your employment so as to avoid further litigation costs.
In short, it could cost you a lot of money…and perhaps even your new job.
If you think that you’re not violating your non-compete agreement, it’s still generally a good idea to hire a lawyer to review it for you to be on the safe side.
Question 9 – Can my employer assign the non-compete agreement to another employer?
Generally, yes. Non-compete agreements are generally assignable, i.e. freely transferable. The two main exceptions to this rule include if the non-compete agreement (i) does not permit assignments or (ii) the non-compete agreement is for a highly individual service (e.g. you contract with a famous artist to paint your portrait).
Next, we’ll go over non-compete agreement question 10.
Question 10 – How can an employer create a valid binding non-compete agreement for its employees?
In short, make sure that the non-compete agreement is "reasonable." In particular, make sure the three main areas are reasonable (see Question 1), as to time, location, and in its purpose (e.g. what it is for). For example, don’t try to refrain your employees from working for anyone, anywhere, for any job. This type of non-compete agreement would likely be dismissed. The issues in a non-compete agreement of how long, and in what geographical radius, is often very fact specific, and a lawyer’s services would be worth the money and effort.
With that said, remember that business owners can place more restrictive provisions in a non-compete agreement in the sale of a business, as compared to employers with their employees.
Finally, we’ll wrap this article up with some main thought to keep in mind.
In this article, we covered some of the most common non-compete agreement questions. If you followed us this far, you likely know more about non-compete agreements than most people. Congratulations! Now, use your newfound knowledge to your benefit and to the benefit of others.
With that said, non-compete agreement issues, like most areas in the law, can be very fact specific, and they may require you to seek advice from a lawyer for your particular situation.
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