Many employment contracts contain provisions restricting the ability of the employee to compete directly with an employer following the termination of the employment agreement. The law has always been at least slightly uncertain in this area as courts have often had difficulty finding the appropriate balance between the right of an employee to earn a living and the right of an employer not to have the investment that they have made in an employee turned against them.
Recent caselaw suggests that there are circumstances where a non-competition agreement will be held up by the courts, and others where the agreement will be set aside. The analysis is based on the details of the employment relationship in question and the nature of the non-competition agreement.
In determining whether an agreement is reasonable, the court will look for a legitimate business purpose for the agreement. If a business can demonstrate real harm that could come from an employee competing against it, in the context of a well-drafted agreement, then the courts are likely to enforce. However, where a blanket clause that thoughtlessly restricts all competition by a former employee is dropped into an employment agreement, then a court is likely to set that clause aside.
When advising clients on how their non-competition agreement should be drafted, the first question we ask is if there is an element to the business that actually requires this sort of protection. If there is, the next step is to find out enough about the nature of the business so that we can craft an agreement that is as limited in scope as possible, while still protecting the business as strongly as possible. This includes considerations on the length of time needed to restrict competition, as well as the realistic geographic protection that requires protection.
The worst type of non-competition agreement is one that has been cut and pasted from another agreement or one that isn’t hand-crafted for the employment relationship in question. If it is worth it to you to add a non-competition clause to your employment agreement, then it is well worth it to talk to us about the right agreement for the job.
-Scott R. Young