The Dilemma of Noncompete Agreements

Many employers ask their workers to sign noncompete agreements in an effort to protect themselves from former employees. Noncompete agreements may take many forms, but most generally seek to prevent an employee from taking certain actions that would be harmful his or her former employer after employment ends. For example, the agreement may prohibit a former employee from working for a competitor for a certain period of time, or might prohibit the former employee from soliciting the clients of his former employer. Many employees sign these agreements without understanding the possible downstream consequences. Although these practices have become increasingly common, the question of whether any particular noncompete is legally enforceable is often uncertain.

Noncompete Agreements are Generally Disfavored in Most Jurisdictions

Many courts across the United States have found that noncompete agreements and other restraints against free trade and commerce are disfavored under the law. This does not mean that courts will refuse to enforce all noncompete agreements. Even in jurisdictions that are hostile to noncompetes, courts will not strike down such agreements carte blanche. However, employees who sign such agreements — or employers who ask their workers to sign them — should understand that courts will closely scrutinize these documents, and if ambiguities arise, will tend to find them unenforceable.

Employers Must Show a Legitimately Protectable Interest

In most instances, the employer will need to be able to show that there was something special, unique, or skilled about the work performed by its former employee, and that the employer would be harmed if a competitor obtained access to these special or unique skills. For example, the bookkeeper for a company may possess special knowledge or skills that are unique or specialized, and may provide an advantage to an employer’s competitor if the bookkeeper transitioned to a different job. Conversely, a member of the company’s maintenance or clerical staff is much less likely to be viewed as having such unique or specialized skills. Looking only at these two examples, courts would be more likely to uphold a noncompete signed by the bookkeeper than one of the company’s janitors.

Geographical Limitations

Courts recognize that individuals should not be trapped at one job forever, and should be permitted to transition to other work opportunities from time to time. Accordingly, courts will generally seek to balance the employer’s interest in protecting itself against competition, and the former employee’s interest in transitioning to other work opportunities. One way that they commonly seek to find this balance is to require that noncompete agreements contain reasonable geographic limitations. For example, a court might find that it is reasonable for an agreement to prohibit a former employee from taking a job with a competitor that is within five miles of his former workplace. Conversely, it is much less likely that a court will uphold a noncompete agreement that prohibits a former employee from taking a job with a competitor in a different city, or anywhere in the state, or even anywhere in the nation. In most instances, courts will require that the limitations set by the agreement are proportionate to the circumstances.

Temporal Limitations

Just like geography, most courts will also require that noncompete agreements contain a reasonable time limitation. For example, a court might find that a noncompete that lasts for six months or a year after the employee leaves his job is reasonable, but is much less likely to find that a time limit of ten years is reasonable.

The Role of the Almighty Dollar

Even though noncompete agreements are generally disfavored in many jurisdictions, they remain commonplace in many industries. Often this is because employers recognize that even if a court would find the agreement objectionable, former employees are at a disadvantage when seeking to contest them. This is largely a function of the fact that litigation is expensive, and in most circumstances the employer has more financial resources than the former employee. In the event of a dispute, both employers and employees will want to think carefully about the role that ancillary consequences, such as litigation costs, reputational harm, and the commitment of time, may play.

If you have questions about noncompete agreements, or any other legal matter, please feel free to reach out to the legal professionals at West & Dunn via our online contact form or by telephone at (608) 975-3042.