Creating Enforceable Non-Compete Agreements
Noncompete agreements, also referred to as covenants not to compete, are often used by cautious employers to protect their proprietary information in the event of an employeeA?a,?a,,?s departure. A successfully drafted noncompete agreement will be enforced to protect a companyA?a,?a,,?s customer goodwill, confidential business information, and trade secrets. While the law regarding noncompete agreements varies from state to state, certain overarching principles apply when determining whether an agreement will be enforceable.
Two Tests for Evaluating the Enforceability of a Non-Compete Agreement
It is important to remember that, because public policy has long favored free commerce and a personA?a,?a,,?s right to pursue a livelihood, noncompete agreements are not favored in the law. This means that courts are likely to find a noncompete agreement unenforceable when it is too broad in scope or when it would constitute an unreasonable restraint on commerce.
Despite public policy preferences, covenants not to compete have been upheld since 1711, when the English case of Mitchel v. Reynolds first formulated what is now referred to as the "common law test" to determine whether a covenant not to compete would be enforced. Pursuant to the common law test set forth in Mitchel, a covenant not to compete is valid if it is ancillary to an underlying contractual relationship and the restraints it imposes are reasonable from three aspects: the possibility of harm to the covenantor (employee), the possibility of injury to the public, and the benefit to be enjoyed by the covenantee (employer). This common-law test of legality is similar to the modern "reasonableness test" under the federal antitrust laws. Under each test, whether or not a covenant is "reasonable" is a question of law for the court to determine.
The Supreme Court of the United States held that a restrictive covenant will violate the antitrust laws if it conflicts with general antitrust policies or is imposed in pursuance of a plan to restrain competition, create monopoly or coerce competitors, or evidences a misuse of a dominant market position.
The antitrust measure of legality with respect to a covenant not to compete involves three primary questions:
A?aEURs? Is the main transaction, which the covenant was designed to protect, valid?
A?aEURs? Is the covenant reasonably necessary to protect that transaction?
A?aEURs? Is the restraint, which it imposes on competition, reasonable?
If any one of the above questions is answered in the negative, the covenant may be invalid under the antitrust laws.
While the test to determine whether a noncompete agreement comports with federal antitrust laws focuses more on the issue of restraint of competition, the common-law test emphasizes an evaluation of the freedom of the individual employee. The Supreme Court of Texas has surmised that:
Rule of reason analysis under antitrust laws must not be confused with reasonableness analysis under the common law. Rule of reason analysis tests the effect of a restraint of trade on competition. By contrast, whether a noncompetition agreement is reasonable depends upon its effect on the parties, the competitors, as it were. The two standards are not directly related. An agreement may be reasonable as between the parties and nevertheless violate antitrust lawsA?a,??Conversely, an agreement may be unreasonable as between the parties and yet not violate the rule of reason test under the antitrust laws.
Despite these confusing tests, there are certain steps an employer may take to ensure that its noncompete agreement will be enforceable and still other steps it may take to help enforcement run smoothly.
Four Ways to Make Your Noncompete Agreement Enforceable
1. Include Consideration.
When creating any contract, there must be consideration. Consideration is something that is done or promised in exchange for a contractual promise. Essentially, it is what makes a contract different from a promise or gift. When a non-compete agreement is created at the time an employee is hired, most courts will find the promise of employment to be consideration sufficient to satisfy the creation of the noncompete. Additionally, most courts will generally find continued employment to be sufficient consideration for a noncompete agreement. However, where the noncompete is created well into an employeeA?a,?a,,?s tenure, some courts will require more consideration than mere continued employment.
2. Tailor Each Agreement to Provide the Protection you Actually Need.
To be enforceable, a noncompete agreement must be reasonable in geographic scope and duration. While some courts may strike overbroad or unenforceable language from an agreement to make it enforceable, many courts will simply find the entire agreement invalid. Therefore, you should draft your noncompete agreement narrowly to provide only the protection you really need.
3. Create a Customized Agreement.
While standard boilerplate agreements can save a company time and money, judges are much more likely to be persuaded by a noncompete agreement that is specific to an individual employee. An agreement that outlines the manner in which a company would be harmed if the employee engaged in unfair competition may require more work for Human Resources, but such specificity is exactly what judges look for when determining whether an agreement is reasonable.