Enforceability of Non-Compete Agreements

Non-compete agreements are commonplace in today’s business world.  Companies often use these agreements to protect their trade secrets and customer bases by restricting the post employment work of an employee. However, these restrictions conflict with basic public policy that an individual is free to work and earn a living and the public’s fundamental interest in free and open competition.  The enforceability of non-compete agreements vary by state, but in general, courts will enforce covenants not to compete only if the employee has knowingly consented to the relinquishment of his or her rights, the restriction is needed to protect important business interests of the company, and the terms of the restriction are fair. 

In order to be enforceable, any agreement by an employee to not compete should be in writing.  It is also recommended that if the non-compete is only part of a lengthier agreement (such as a non-disclosure agreement), the employer should have the employee initial next to the non-compete provision.  Some states require that a non-compete be signed at the beginning of the employment relationship and will only consider the enforcement of a non-compete signed after the initial employment date if the signing was accompanied by a promotion, a raise in pay or another event that would constitute consideration for signing the non-compete.

Whether a company has an important and protectable business interest will depend on the facts of each situation.  Courts have provided general guidance, though.  In Maryland, for instance, a covenant not to compete is valid only if the employer can prove that it is needed: (1) to prevent the loss of routes or customer lists or the solicitation of customers; (2) to prevent the loss of an employee who was hired to provide ''unique'' services; or (3) to prevent the loss of trade secrets to a competitor.  A covenant not to compete will not be enforced simply because the employer taught the employee certain skills or to prevent the employee from competing with the employer.

 Even if an employer has an important and protectable business interest, the restriction must be reasonable under the circumstances.  Whether a specific covenant not to compete is reasonable depends on the geographical area, duration of time and the nature of the activities restricted viewed in light of the nature of the employer's business and the worked performed by the employee for the employer.  Courts will consider not only the business interest of the employer, but also whether the non-compete imposes an undue hardship on the employee or the public.

A covenant not to compete that is found to be unreasonable might still be enforced, as there is a trend in some states to rewrite such unreasonable covenants not to compete.  However, if there is a deliberate intent by an employer to place an unreasonable and oppressive covenant not to compete on an employee, courts generally will find the entire covenant unenforceable and will not rewrite it.

A note of caution to employers hiring employees that are subject to non-compete agreements.  A former employer can seek damages from a new employer for tortiously interfering with an employee's covenant not to compete.  Factors consider by courts in determining whether a new employer has tortiously interfered are whether the new employer hired the employee knowing of the covenant not to compete; whether the new employer capitalized on certain accounts or information held by the employee but protected by the covenant not to compete; whether the new employer encouraged the employee to contact the customers of the old employer; whether, after injunctive relief was awarded against the employee, the new employer itself solicited business from the old employer's customers; and, generally, whether the new employer acquiesced in or benefited from the wrongs of the new employee.