Noncompete Agreements: When are They Enforceable? - Free Enterprise

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Noncompete Agreements: When are They Enforceable?

Many people who used to have jobs also have non-competition agreements in place with their former employer. The agreements themselves vary, as do the state laws determining their enforceability. For small businesses putting new non-competes into place and for those wondering whether they are bound by an old non-compete, here are the basics on when non-competes can be enforced.

Non-competition agreements have direct impact on three groups of people: employers wishing to enforce them, workers who want work in the same area as their old boss, and new employers who can face liability for hiring someone in violation of the new-hire's old non-compete.

The law on noncompetition agreements varies by state. In some states, such as California, noncompetes are unenforceable, with very limited exceptions. To find a non-compete enforceable, other states generally require it to be reasonable as to scope, time and geography, and that the employee get something in return for entering the agreement.

All contracts require "consideration" (something of value) from all parties. At the beginning of a job, the benefit gained by applicant can be the job itself. For existing employees, continued employment generally is not considered adequate consideration, so something else would need to be given in exchange for agreeing to a new non-compete.

As for of reasonableness, the agreement must be reasonably designed to protect the employer's interests without unduly burdening the employee's ability to earn a living in their field. Its scope, duration and geographic area must be no larger than necessary to protect the employer's legitimate business interests. Preventing honest competition is not a legitimate business interest.

In terms of scope, non-competes generally will not be enforced if they try to block the employee from working in an entire field. In terms of time, non-competes with no time limit are very unlikely to be found enforceable. Geographically, non-competes that purport to apply nation- or world-wide stand very little chance of enforcement. Generally, non-competes that cover geographical areas unserved by the employer are also unlikely to be enforced.

If a court finds a non-compete to be too far reaching, it can narrow it to make it enforceable, or refuse to enforce it entirely.