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Non-competition agreements #11
by Ross Runkel at LawMemo
For a current employee, there is a duty not to compete against the employer. The employee has a duty of loyalty to the employer, is hired to advance the employer's interests, and should not "moonlight" for a competitor and should not drain away the employer's business by going into direct competition.
For a former employee, the starting point is that the law favors free markets and open competition. Therefore, courts rarely find an "implied" duty or agreement not to compete. For a former employee, there must be an express agreement that the former employee will not compete against the former employer.
Assuming a non-compete agreement is enforceable, the former employer usually can get an injunction against the employee and also recover money damages.
Non-competition agreements are enforceable if, and only if, they comply with certain guidelines.
First, there must be "consideration" for the employee's promise not to compete. That means that the employee must have received something in exchange for the promise. For a newly-hired employee, beginning employment is the consideration. For a current employee who signs a non-compete agreement, a few courts see continued employment as good consideration, but most do not. There must be something more such as an increase in pay, a promotion, or some other benefit to the employee.
Second, the agreement not to compete must protect some legitimate business interest of the employer. It can't be designed simply to suppress normal competition. Examples of legitimate business interests:
- Trade secrets.
- Customer lists.
- Other confidential information.
- Special or unique relationships with customers or clients.
- Goodwill.
Note: If either of the above two items (consideration and legitimate business interest) is missing, a court will not enforce a non-competition agreement.
Third, the scope of the agreement not to compete must be "reasonable" and not "overbroad." This involves three concepts.
- Geography. The geographic limits must be reasonable. If the employer is a laundry in a small town, restrictions that go beyond that town would be unreasonable because they do not line up with the employer's legitimate business interest. (As businesses increasingly operate world-wide, courts have to wrestle with what is a reasonable geographic scope.)
- Time. There has to be a time limit, but what is a reasonable time? Perhaps the amount of time it will take the employer to train a replacement.
- Activity. Can the employee be prevented from doing any work for a competing business? Probably not. The new work has to have some relationship to the employer's legitimate business interest. A former tire salesperson should be allowed to work as janitor in a competing tire shop, but not as a manager.
If the scope of the agreement is overbroad, what will a court do? Most courts will (1) cut the scope of the agreement down to what is reasonable and (2) go ahead and enforce it. However, a few courts will not "fix" the agreement, and will simply not enforce it.
Coming next: Trade secrets & confidential information #12: Employment Law 101
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Editor: Ross Runkel, Professor of Law Emeritus. email Ross@LawMemo.Com, Phone 503-399-8028. Copyright LawMemo, Inc.
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