Non-competition agreements serve to protect from misuse by a former employee the hard-earned goodwill and customer relationships an employer has developed.
However, courts impose strict requirements on the enforceability of non-competition agreements. In all jurisdictions were non-competition agreements are enforceable, the following requirements must be met:
- The non-competition agreement must be supported by adequate consideration. This means that the employee signing the agreement gets something in return for the restriction. At the commencement of the employment relationship, consideration is not usually an issue, as the employee is getting a new job for agreeing to the restriction. However, attempting to have an employee sign a non-competition agreement as a condition of continued employment is insufficient in some states, including Pennsylvania. In these states, increased compensation, duties, or a payment will be required to make such the non-competition agreement enforceable.
- The non-competition agreement must protect a legitimate business interest of the employer. Simply not wanting the employee to work for a competitor is not enough. There must be a business asset that is protected, such as confidential information or goodwill. Where the employee acts as the face of the company, such as a sales person, protection of goodwill through a non-competition agreement is particularly appropriate.
- The non-competition agreement must be reasonably limited in duration and scope. The restrictions must be imposed only to the extent necessary to protect the legitimate business interest of the employer. Typically, duration of one to two years will be appropriate. As for scope, the limit can be expressed in terms of geography (e.g., all states east of the Mississippi), or industry (e.g., steel producers). The key here is that the company must be able to articulate the reasons why it needs the precise duration and scope of the restriction imposed in order to protect its legitimate business interest.
A narrowly tailored non-competition agreement is substantially more likely to be enforceable. While some courts will limit the restrictions imposed by overly broad non-competition agreements and enforce the agreement as limited, other courts will simply find overly broad non-competition agreements to be unenforceable. Each state has particular rules for each of the requirements outlined above, and careful attention must be paid to those rules to ensure that an enforceable non-competition agreement is drafted.
Michael Vizzini, a summer law clerk, assisted in the preparation of this article.