It is a common practice for many employers to require new hires to sign agreements regarding certain conditions of their employment. While many of these agreements concern the duties of an employee during the course of their employment, many companies will often require employees to sign contracts that affect their conduct after their job has ended.
The most significant of these agreements tends to be the Noncompetition Contract, which prohibits an employee from entering into competition with his or her employer after leaving the company. These agreements often dictate a certain period of time during which a person cannot compete with his or her former employer after terminating the employment relationship. For persons working in particular fields, such as sales or marketing, these agreements can obviously be a cause of great concern. Often this results taking a job outside of the field you work in until the agreement expires, which could mean a significant cut in pay or benefits.
Courts will generally enforce these agreements, under the theory that the employee has bargained for this agreement with continued employment as consideration for the limit on competitive work after leaving the company. If this seems unreasonable to you, you’d be correct. Employers have markedly higher bargaining power in these situations than their employees — either you agree to the noncompete, or they’ll fire you.
Despite the attitude of courts towards these contracts, there are a number of situations that might render a Noncompete Agreement unenforceable, or in the very least, prompt a court to modify the terms of the agreement that are more equitable to the employee. When faced with a former employer attempting to enforce a Noncompete, keep an eye out for:
Lack of Consideration
Consideration is generally defined as a benefit bargained for between two parties. In order for a noncompetition agreement to be enforceable, there must be valid consideration. In this context, consideration is usually viewed as the employer agreeing to hire the employee in exchange for the employee’s promise to not compete with the employer upon the expiration of employment.
Courts have also found valid consideration in noncompetes entered into once employment has already begun. However, if there is no change in employment terms (promotions, pay raises, new duties, etc.) and no promise for continued employment, courts will likely find that the agreement lacks consideration, and is unenforceable.
No Legitimate Business Interest
For a noncompete to be enforceable, the employer must have a “legitimate business interest” that will benefit from the agreement. Legitimate business interests include: protection of goodwill, client relationships, confidential information, trade secrets, and the exceptional and special skill or knowledge acquired by their employees during the employment.
However, employers have no legitimate interest in merely protecting themselves from ordinary competition. If a former employee is simply competing with the former employer, but is not utilizing any special training, client contacts, or trade secrets obtained from his or her prior employment, a court might find a noncompete unenforceable against the employee.
Unreasonable Duration or Geographic Scope
If a noncompete has an extensive duration or prohibits competition within a large geographic area, a court will likely find the agreement to be unreasonable. If an agreement is unlimited in duration, but is limited in geographical reach, or vice versa, courts will generally find that agreement unenforceable.
A time restriction must only be for as long as is necessary to protect an employer’s business interest. Geographic restrictions should be limited to the area in which the employee worked, or to the employer’s business market area. If the terms of a noncompete surpass these limits, a court may modify the scope of the terms to make the agreement more reasonable.
In the event that an employer has asked you to sign a noncompetition agreement, it would be good practice to consult an attorney about the agreement’s contents, and how your rights will be affected if you agree to its terms. And if a former employer is seeking to enforce such an agreement on you, an attorney’s assistance is almost certainly necessary to avoid harsh penalties or to have the contract rendered unenforceable, to the extent that those options are available to you.