Simone Lawson
Non-compete agreements are contracts between employers and employees that prohibit the latter from competing with the business directly or indirectly for a specific duration of time after their employment has ended. They are designed to protect the employer's trade secrets and market position. However, non-compete agreements can also be seen as unnecessarily broad and restrictive on an employee's ability to earn a living. For example, some agreements may prevent employees from working for a competitor, even if the new job does not involve disclosing trade secrets. The duration and scope of non-compete agreements, including time and geographic restrictions, must be reasonable, and overly broad restrictions may be deemed unenforceable.
| Characteristics | Values |
|---|---|
| Time duration | Should be reasonable and not too long or broad. Typically, six months to two years is considered acceptable, with one year being common. |
| Geographic scope | Should be reasonable and not too broad. The smaller the area, the more likely it is to be enforceable. |
| Scope (functional and otherwise) | Should not be overly broad or vague. Should outline specific restrictions on future employment opportunities. |
| Public policy | Should not violate public policy. Should not unreasonably restrict an employee's ability to seek new employment or go against the public interest. |
| Notice | Should be clear and conspicuous. Employees should be given reasonable notice of the restrictions before or at the time of entering into the agreement. |
| Trade secrets | Should not restrict employees without trade secrets. |
| Non-solicitation | Should not be so broad that it prevents a worker from seeking or accepting another job or starting a business. |
| Exit fees and liquidated damages | Should not prevent workers from working for another firm or starting a business. |
| Independent contractors | Should not affect the labor mobility of independent contractors. |
| Earnings claims | Should not make false or misleading claims about potential earnings. |
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What You'll Learn
Unreasonable time restrictions
Non-compete agreements are common in industries such as media, where a television station might have legitimate concerns that a popular meteorologist could take viewers with them if they began working for a rival station in the same area. While these agreements are designed to protect an employer's interests, they should also be fair to the employee signing them.
A non-compete agreement typically lasts between six months and two years, depending on the state's laws. However, some agreements can be unreasonably long, indefinite, or vague about the time period, making them unenforceable. For example, in the case of Dale v. Hoschar, an agreement that lacked an end date for the restriction was deemed "indefinite in its time limitation" and "unenforceable as a matter of law". Similarly, a court may find an agreement unreasonable if it expects an employee never to work for a competitor.
Courts will also consider whether the agreement is too broad in scope, including its geographic scope, and whether it unnecessarily restricts a worker's ability to find employment. For instance, non-solicitation agreements that are so broad that they prevent a worker from seeking or accepting another job or starting a business may be deemed anticompetitive.
The Federal Trade Commission's (FTC) proposed rule on non-compete agreements would prohibit employers nationwide from entering into any non-compete agreements with workers, treating provisions as non-competes based on how they function rather than their precise form. This rule is broader than most state laws, which generally treat non-competes as enforceable, subject to considerations of reasonableness, public policy, and notice.
Overall, while non-compete agreements can serve a legitimate purpose, they must be reasonable in their duration and scope to be enforceable. Unreasonable time restrictions, such as those that are overly long or indefinite, can render these agreements unenforceable in court.
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Overly broad geographic restrictions
Non-compete agreements are designed to protect an employer's interests by preventing employees from sharing proprietary information with competitors. However, these agreements must be fair to both the employer and the employee. When it comes to geographic restrictions, it is essential to set reasonable boundaries to avoid being overly broad.
To determine the geographic scope of a non-compete agreement, consider the employee's duties and responsibilities and the locations where these duties will be performed. For example, an employer may want to restrict competition in the areas where they operate or have established customer relationships. If the employee works in a specific region or sales territory, the geographic scope should be limited to that area. It is important to note that the geographic scope should be based on the location of employment activities and not the remote home office location for remote employees.
Courts will consider the type of business, the employee's specialized knowledge, and the time it will take to train a replacement when evaluating the reasonableness of geographic restrictions. For instance, in the case of Amex Distributing Co., Inc. v. Mascari, a 36-month restriction prohibiting the employee from working with any competitor was deemed unreasonable. Similarly, in Bryceland v. Northey, the court refused to enforce a non-compete agreement that prohibited a disc jockey from providing services within a 50-mile radius of Phoenix or any other job sites for two years.
On the other hand, courts have upheld non-compete agreements with reasonable geographic restrictions. In Bed Mart, Inc. v. Kelley, the court enforced a six-month, 10-mile restriction on the employee working for any company with more than 50% mattress sales. To ensure enforceability, employers must carefully draft non-compete agreements, balancing their business interests with their employees' right to earn a living.
In conclusion, when drafting non-compete agreements, it is crucial to set reasonable geographic restrictions that protect the legitimate business interests of the company without overly limiting the employee's ability to seek alternative employment.
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Restricting an employee's ability to seek new employment
Non-compete agreements are contracts between employers and employees that are typically signed at the beginning of their working relationship. These agreements contain specific clauses stating that the employee will not work for a competitor after their employment ends, regardless of whether they are terminated or resign. They are designed to protect an employer's trade secrets and market position. However, they can also restrict an employee's ability to seek new employment and earn a living.
To be considered fair and enforceable, non-compete agreements must meet certain criteria. Firstly, they must be reasonable in scope and duration. Overly broad or long restrictions may be deemed unenforceable. This includes geographical scope, which should be limited to a specific city or area where the employer operates, rather than an entire state. A reasonable time frame for a non-compete agreement is typically between six months and two years, with one year being quite common. Anything longer may be deemed unreasonable, and an indefinite agreement is out of the question.
Additionally, non-compete agreements must not violate public policy. They should not unreasonably restrict an employee's ability to seek new employment or go against the public interest. For example, non-solicitation agreements that are so broad that they prevent a worker from seeking or accepting another job are considered anticompetitive. Similarly, exit fee provisions that require workers to pay a financial penalty for leaving their jobs may be anticompetitive if they prevent workers from working for another firm.
Before signing a non-compete agreement, employees should carefully review the terms and seek legal advice if necessary. While these agreements aim to protect an employer's interests, they should also be fair to the employee. Employees should consider their future career plans and how the agreement might impact their ability to seek new employment opportunities. Speaking up and making adjustments to the agreement before signing can help avoid legal issues down the road.
It is worth noting that the enforceability of non-compete agreements varies by jurisdiction. While some states adopt standards that restrict the length of time and geographical scope of these agreements, others view non-competes as overly restrictive on competition, making them enforceable only in certain circumstances or not at all. The Federal Trade Commission (FTC) has proposed a rule that would prohibit employers nationwide from entering into non-compete agreements with all workers, but this has not yet been implemented.
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Preventing employees from starting a business
Non-compete agreements are a common way for employers to protect their business interests and prevent employees from starting a competing business. However, these agreements must be reasonable and not overly restrictive to be enforceable. Here are some key considerations for preventing employees from starting a competing business without falling into the trap of an unnecessarily broad non-compete agreement:
Duration and Scope
The duration of a non-compete agreement should be reasonable and not overly long. While the typical duration ranges from six months to two years, anything longer than two years is generally considered unreasonable, and an indefinite agreement is unenforceable. The scope of the agreement should also be reasonable and not overly broad in terms of geography, function, and market. A broader geographical area, such as an entire state, will be harder to justify and enforce than a specific city.
Protecting Trade Secrets and Confidential Information
Non-compete agreements are designed to protect an employer's trade secrets and confidential information. However, critics argue that these agreements can restrict worker mobility and an employee's ability to earn a living. To avoid this issue, ensure that the agreement is tailored to protect specific trade secrets and confidential information that could give a competitor an advantage.
Employee Considerations
Non-compete agreements must be fair to both the employer and the employee. They should not violate public policy or unreasonably restrict an employee's ability to seek new employment. For example, an agreement that prevents a worker from seeking any job or starting a business in their field could be deemed anticompetitive and unenforceable.
Notice and Understanding
Employees must be given clear and conspicuous notice of the restrictions in the non-compete agreement before or at the time of entering into the agreement. It is also advisable for employees to seek legal advice to understand their rights and the obligations and restrictions of the agreement before signing.
State and Local Laws
Finally, it is essential to consider the laws and regulations of the specific state or locality. Each state has different legislation regarding the enforceability of non-compete agreements, and some states view them as overly restrictive on competition — meaning they are only enforceable in certain circumstances or not at all. For example, D.C.'s non-compete law prohibits non-competition provisions for covered employees but allows agreements with "highly compensated" employees who meet certain requirements.
In conclusion, while non-compete agreements can be a valuable tool for preventing employees from starting a competing business, they must be carefully crafted to be reasonable, fair, and in compliance with local laws to avoid being deemed unnecessarily broad and unenforceable.
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Not protecting trade secrets
Non-compete agreements are a legal tool used by companies to protect their trade secrets and other business interests. These agreements prevent employees from joining or starting a competing business within a certain time frame and geographic scope after their employment ends. They are designed to protect an employer's sensitive information, customer relationships, and trade secrets.
Trade secrets are a type of proprietary information that provides a company with a competitive advantage. They encompass a broad range of confidential business information, including formulas, practices, designs, instruments, patterns, or processes that are not generally known to the public. The protection of trade secrets is a matter of internal security within a company, and legal protections offer recourse in instances of misuse or unauthorized disclosure.
However, non-compete agreements must strike a balance between protecting legitimate business interests and not unduly hindering a former employee's right to work. Some non-compete agreements may be deemed unnecessarily broad and thus unenforceable if they violate public policy or unreasonably restrict an employee's ability to seek new employment. For example, non-compete agreements that are against the public interest or do not allow employees to use the same skills and experiences they brought to the company may be considered overly restrictive.
Additionally, non-solicitation agreements, which prohibit a worker from soliciting former clients, can also be considered anticompetitive if they prevent a worker from seeking or accepting another job. The Federal Trade Commission (FTC) has proposed a rule that would prohibit employers from entering into non-compete agreements with all workers, as they can hinder competition and employee mobility.
In conclusion, while non-compete agreements are important for protecting trade secrets, they must be carefully drafted to ensure they do not unduly restrict employees' rights and mobility. Employers should consider the specific trade secrets and interests they aim to protect and tailor the agreement accordingly.
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Frequently asked questions
A non-compete agreement is a contract between an employer and an employee that is typically signed at the start of their business relationship. It prohibits the employee from competing with the employer within a specific location and time duration after their employment has ended.
A non-compete agreement may be considered overly broad if it unreasonably restricts an employee's ability to seek new employment or violates public interest. The duration and scope of the agreement, including time and geographic restrictions, must be reasonable and not vague or ambiguous.
Non-compete agreements protect employers from employees leaving and sharing proprietary information or trade secrets with competitors. They also ensure that employees do not use information learned during their employment to start a competing business.
A non-compete agreement with a broad geographic scope, such as restricting an employee from working in an entire state, may be considered overly broad. Additionally, an agreement that is indefinite or lasts longer than two years is likely to be deemed unreasonable.
Violating a non-compete agreement can result in civil penalties. The employer may sue the employee for breach of contract and seek financial damages for any losses caused by the employee working for a competitor.
