Non-compete contracts (or agreements) serve an essential function in commercial life – since the middle-ages they’ve been used to regulate the actions of workers after they’ve left their jobs. Yet these contracts have always been controversial: one of the most cited cases in which a court declared a non-compete agreement void and unenforceable takes us back all the way to 1414.
What is a Non-Compete Agreement?
Although non-compete agreements can take on many different forms, they share the same essential feature: restricting or delaying one party’s ability to compete with the other party. In an employment context, this means placing a restriction on what future employment may be available to an employee.
From an employer’s perspective, a non-compete contract lowers the risk associated with sharing trade secrets, client lists, and other strategic resources with employees. It allows companies to claim a protectable interest in employees’ expertise and “inside knowledge” as well as their work.
However, non-compete clauses tend to be burdensome on employees. Courts have acknowledged that such clauses limit a person’s ability to pursue a livelihood. Non-compete clauses also restrict competition, resulting in lower wages and the removal of professional skills from the free labor market.
Non-Compete Agreements Laws by State
It is a precarious task to balance these competing interests. As is so often the case with difficult questions, different states tend to reach different answers. With the general exception of California and Oklahoma, most states enforce non-compete clauses under specified circumstances. In all cases, non-compete enforceability depends on whether the court deems the particular clause reasonable.
According to New York law, for example, a non-compete clause will be reasonable when (1) the agreement is necessary to protect the employer’s legitimate interests, (2) it is not harmful to the general public, and (3) not unduly burdensome to the employee. Most states define reasonableness along similar lines, with different emphases and further restrictions.
The following five factors shape the law on non-compete clauses across states:
1. The Context of the Agreement
A non-compete agreement will only be enforceable if it can be shown to be supplemental to another enforceable contract. Most states recognize two such instances. The first is an employment contract, and the second a contract for the sale of a business. States are more likely to enforce non-compete clauses in the latter case than in the instance of an employment contract.
2. Protectable Interests
In order to enforce a non-compete clause, a plaintiff (in this case the employer) will generally be required to demonstrate that the clause is necessary to protect his or her legitimate interests. As to the question of what types of interests are deemed protectable, states tend to reach different answers.
In New York, for example, protectable interests include confidential customer information, protection of trade secrets, and a business’s client base. By contrast, Missouri also considers “stability in the workforce”, and “protection from unfair competition” as protectable interests. Even in California, where non-compete clauses concerning employees are generally unenforceable, trade secrets may well represent a protectable interest for which courts would consider a non-compete clause valid and enforceable.
3. Scope of the Activity Restrained
How broad or narrow the scope of the restraint is will affect its validity. If the restraint is specifically defined it will generally be easier to enforce than if the restraint is vaguely formulated. As you would expect, the interpretation of what is narrow and what is broad differs from state to state. In Florida, for example, the scope of the activity constrained must “not impose a greater restraint than reasonably necessary to protect the legitimate business interests of the party seeking to enforce the non-compete clause”. By contrast, Georgia requires much more specific delineation: in order to be enforceable, the agreement must be specific about the particular business activities to be restrained.
4. Proof of Consideration or Benefit
A contractual obligation is only valid and enforceable if one can prove consideration – a benefit received by the other party to the contract. Non-compete agreements are no exception to this rule. In many states (27, to be exact) courts have determined that continued employment constitutes sufficient consideration. This means that, if an employee obtained employment (which presumes payment for work) in exchange for signing the non-compete agreement, consideration has been established. Washington, Pennsylvania, and Texas have ruled that continuing employment is not sufficient. In these states, a plaintiff would have to prove that some additional benefit specific to the non-compete agreement had accrued to the employee.
5. Judicial Modification (Whether courts can amend contracts)
A final important consideration is a particular state’s approach to judicial modification. Certain states (e.g. Oregon and New York) allow reformation. This means that a non-compete clause that is found to be unenforceable can be amended and reformulated by a judge so that the resulting clause is enforceable and valid. An error or overreach in a non-compete agreement will therefore not, in these states, be fatal to its operation.
Other states, such as Nebraska, are so-called “red pencil states”. Here, a non-compete clause that does not meet all requirements will be considered void in its entirety. Finally, in “blue pencil states” such as Rhode Island and North Carolina, a court could remove certain words or phrases from a non-compete clause until it can be considered enforceable, but not add anything.
In each of these cases, a state’s approach to judicial modification will have significant strategic implications for how a non-compete clause should be drafted.
Consulting an Employment Attorney
Despite there being no short and easy answer to the question of enforceability, this summary provides at least one clear lesson: non-compete clauses should be carefully worded to track the policies of your state. LawTrades works with experienced Employment Attorneys all over the country to provide personalized legal advice to help guide employees and business owners through any issue.