Unlike the law applicable to trade secrets, where states have relatively uniform laws based upon the Uniform Trade Secrets Act, there is no uniform non-compete act. The law applicable to non-compete agreements varies from one jurisdiction to the next.
Nevertheless, most jurisdictions recognize certain basic principles for the interpretation and enforcement of non-compete agreements. Every state has an interest in free-trade and commerce both within and outside of its borders. Non-competes, by their very nature, are contracts in restraint of trade and therefore are disfavored as a matter of public policy.
By the same token, the government has a legitimate public interest in preventing unfair competition. To that end, Congress and state legislatures have enacted numerous laws to prohibit or discourage unfair competition. Antitrust statutes and regulations, prohibitions on false advertising, and legislation protecting patents, trademarks, and copyrights are examples of such laws.
To that end, in most states, non-compete agreements are enforceable if they are limited to what is reasonably necessary to protect an employer’s legitimate business interests. (California, North Dakota and Oklahoma ban them except for cases involving a non-compete that goes with the sale of a business.) A well-drafted, thoughtful non-compete agreement that is reasonable in its geographic and temporal scope and that goes no further than necessary under the circumstances of the employer’s industry and the employee’s position in the company, will almost always be upheld against a legal challenge in those jurisdictions that recognize the legitimacy of non-compete agreements.
However, in a surprisingly large number of cases, non-compete agreements are neither well-drafted nor thoughtful. They are overbroad and extend far beyond the mere prevention of unfair competition; they also hinder ordinary competition. An oft-stated principle in judicial opinions resolving non-compete disputes is that while an employer has a legitimate business interest in protecting against a former employee’s competition by improper and unfair means, it is not entitled to protection against ordinary competition from that employee. For this reason, many companies avoid use of the term “non-compete” in such agreements because it is not descriptive, instead opting for “conflicting employment” or a like term that is more accurate.
Factors to be taken into account in evaluating non-compete agreements include the following:
· Are there limitations as to time and place of competitive employment?
· Is the employee the employer’s sole contact with a customer?
· Does the employee have access to and knowledge of the employer’s confidential
information or trade secrets?
· Does the non-compete covenant eliminate competition which would be unfair to the
employer or does it spill over to eliminate ordinary competition?
· Does the non-compete stifle the inherent skill and experience of the employee?
· Is the benefit to the employer out of proportion to the detriment to the employee?
· Does the covenant operate as a bar to the employee’s sole means of support?
· Is the forbidden employment merely incidental to the current employment?
The good news for both employees and employers is that in addition to legitimate non-compete restrictions, there are other ways for an employer to protect its legitimate business interests against a former employee without risking inclusion of an overbroad non-compete restriction. For example, contracts prohibiting post-employment solicitation of an employer’s customers, clients, patients, employees, contractors, and to a certain extent vendors and suppliers of customized solutions, are almost always enforceable. Coupled with very narrowly drawn non-compete provisions, trade secret protections, and non-disclosure agreements are usually all that is necessary to truly protect a business’s legitimate business interests.