One of the trickier agreements that companies must deal with is the Non-Compete Agreement, simply because the document needs to strike the right balance between protection and freedom. The non-compete agreement is a written understanding in which one party, usually a departing employee or partner, agrees not to compete in the same field or profession as the second party, usually a company or partnership, for a specified length of time and within a certain geographic area. Typically, a company will conclude a Non-Compete Agreement between itself and one of its employees. This may occur upon hiring the employee (and the “agreement” may in fact be a clause in the employment contract); or it may occur at the employee’s termination with the company, either in a formal agreement or, again, as a clause in a separation contract.
Consideration plays an important but overlooked role in Non-Compete Agreements. The employee, it must be remembered, is agreeing not to compete with his former employer in the field in which he ostensibly has certain valuable knowledge. For the employee to give up this right, even briefly, the company must offer something of worth in exchange. The promise of a job may suffice (for the new hire), as may continued employment or the prospect of a raise (for the existing employee).
Meanwhile, the company must also be protected. The point of the Non-Compete Agreement is to safeguard a company’s sensitive business information or trade secrets. Courts have determined that a certain level of protection, albeit at the expense of terminated employees, is merited. The key is reasonableness. Companies may protect their legitimate business interests. Thus, a non-compete that is overbroad-denying the employee the right to work anywhere in the state or the country, or for a period of time going into the years-likely will be struck down. At the same time, it should not be forgotten that some companies have secrets that warrant very broad non-compete agreements.
Many states courts-and the law differs in this area of the law from state to state-will strike down overbroad Non-Compete Agreements in their entirety. Others will “blue line” them-eliminating only the invalid parts. California leads the way in banning non-compete agreements altogether, except in the case of the sale of a business. In this instance, the new business owner should not be denied the company’s existing goodwill.
Another aspect to consider is how the employee left the company. If he was let go through no fault or design of his own, then a court may be less likely to enforce a non-compete agreement, especially a highly restrictive one. Conversely, if he quit or was terminated for cause, then the balance tips in favor of the company.
Sometimes, companies understand that the agreement they place before one of its employees is not likely to be enforced. For these organizations, it is enough to have the employee intimidated and wary about ever crossing the company.
All in all, the Non-Compete Agreement is a valuable tool for companies. But for it to be most useful, its drafters must find that proper equilibrium between the company’s legitimate interests and the employee’s right to work.
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