Noncompetition Agreement

By James Parker
/
June 13, 2022

What Is Noncompetition Agreement?

A noncompetition agreement, also known as a noncompete or covenant, is a legally binding contract that prevents an individual from doing business or seeking employment with certain employers. A noncompetition agreement can vary in timeframe, geographic scale, and circumstance but all of them are intended to prevent the previous company’s loss of trade secrets or other private information.

Noncompetition agreements can limit an employee’s prospects for employment after leaving the company. In addition to formal employment, a noncompetition agreement may also prevent the employee from taking a position as a partner or independent contractor working for the specified companies.

Though an employer can request that an employee sign a noncompetition agreement at any time before or during their employment, they are chiefly implemented at certain milestones such as during the hiring process, shortly before a promotion or raise, or after an employee is announced to be leaving the company. 

While noncompetition agreements may be common in many industries, they are not universally enforceable. Certain states will not enforce certain noncompetition agreements, while other states may not enforce them at all. In Oklahoma, for instance, noncompetition agreements do not have to be enforced. In California, employers who ask that a noncompetition agreement be signed can be sued. Hawaii has specifically outlawed noncompetition agreements in the high-technology sector. This limits employers’ ability to enforce noncompetition agreements depending on where they and their employees are located.

Key Takeaways

  • A noncompetition agreement is a legal contract that forbids employees that sign it from working for competing businesses in a certain area for a certain period of time. 
  • Some states selectively enforce or refuse to enforce noncompetition agreements.
  • If an employer wants to create an enforceable noncompetition agreement, they will need to provide an incentive at the time of signing, protect a legitimate business interest, and be reasonable in the timeframe and scope of the agreement.
  • If you believe you have been forced into an illegal, unfair, or unenforceable noncompetition agreement, an experienced Employment Law attorney may be able to improve the outcome of your case by utilizing experience and expert knowledge.

Noncompetition Agreement and Employment Law 

Noncompetition agreements can be a legal gray area. Some noncompetition agreements may be viewed by the court as fair and enforceable while others from the same company may be found to overreach or be unreasonable.

In general, when a court is deciding whether or not a noncompetition agreement is legally valid they will consider three factors: consideration at signing, the legitimacy of business interests, and the scope and scale of the terms. These three factors are pivotal for establishing the most basic validity of a noncompetition agreement.

The first consideration when determining the validity of any contract is whether there was “consideration.” In layman’s terms consideration often just means thinking about or “considering” something. However, in contract law consideration refers to the exchange of value in an agreement. 

For example, most employment contracts trade the employee’s labor for the employer’s money. In this way, both sides have consideration. In order for a noncompetition agreement to fulfill the consideration requirement, the employee must receive something of value in exchange for their noncompetition. If this agreement is provided at the beginning of the employment relationship, then the courts generally hold that employment is enough of a gain to qualify as consideration. However, continued employment is not a valid consideration. So an employee who has been working for a company for some time will need some additional incentive such as a raise or promotion in order to fulfill their consideration requirement. 

Once consideration is established, the court will consider the employer’s business interests. An employer must have a legitimate business asset that is worth protecting in order to enforce a noncompetition agreement. This could be as intangible as “goodwill” with customers to something as cut and dry as a secret recipe or patented design. As long as the business can demonstrate that the employee has knowledge or abilities from working with them that give the employee a “competitive advantage,” courts will likely find that a legitimate business interest is being protected.

Even if the business interest being protected is legitimate however, the scale of the noncompetition agreement has to be considered. While the protection of business secrets is important, the court also must consider the burden that enforcing the noncompetition agreement will impose on the employee. In general, the noncompetition agreement cannot extend for a period of longer than two years. Additionally, noncompetition agreements can generally only be enforced in the geographical areas in which the former employer does business.

The courts have generally held that while protecting a business is reasonable, preventing the employee from working in the sector ever again for any other company is generally not. This means that “lifetime” noncompetition agreements or noncompetition agreements that are nationwide are generally considered able to be fought. 

If a court finds a noncompetition agreement to be invalid in its current state, then they will take action. This may mean adjusting the terms of the noncompetition agreement until they are considered reasonable again, or it may mean that the court will refuse to enforce the noncompetition agreement at all.

Bottom Line

If you are trapped in a noncompetition agreement that you feel imposes an undue burden on your ability to find new work, you may be able to limit or even ignore the noncompetition agreement with a lawsuit. In order to file and prevail in that lawsuit, you will need the help of an experienced Employment Law attorney. 

An Employment Law attorney can use their legal expertise, trial tactics, and expert witnesses to help you achieve the best possible outcome for your case. Your Employment Law attorney can go over the terms of your noncompetition agreement and zealously advocate for the adjustment or non-enforcement of the unfair parts of it.

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