Noncompete Agreement

Noncompete Agreement

A contract limiting a party from competing with a business after termination of employment or completion of a business sale.

Found in some business contracts, noncompete agreements are designed to protect a business owner's investment by restricting potential competition. Generally, businesses pursue these agreements in two instances: when hiring new employees, or when purchasing an established business. The noncompete agreement is a form of Restrictive Covenant, a clause that adds limitations to the employment or sale contract. These agreements protect the business by restricting the other party from performing similar work for a specific period of time within a certain geographical area. First used in the nineteenth century, and common today in certain professions, noncompete agreements sometimes have an uncertain legal status. Courts do not always uphold them. Generally, courts evaluate such clauses for their reasonableness to determine whether they constitute an unfair restraint on trade.

The rationale behind noncompete agreements is an employer's self-interest. Typically, companies invest heavily in the training of their employees. Similarly, they have an interest in protecting their customer base, trade secrets, and other information vital to their success. The noncompete agreement is a form of protection against losses. The company does not wish to invest in an employee only to see the employee take the skills acquired, or the company's customers, to another employer. Thus, when hiring a new employee, the company may make her sign a noncompete agreement as part of a condition of employment. Likewise, the prospective purchaser of an established business may only buy it if the current owner is willing to sign a noncompete agreement.

In practice, such agreements are very specific in several respects. Usually the agreement will define a length of time, geographic radius in miles, and type of activity in which the employee promises to refrain from working after leaving her or his job. This is often the case in businesses that depend on an established group of customers. A hair salon, for example, may require its stylists to agree not to compete against it in neighboring hair salons. Noncompete agreements are also well established in fields where an individual is associated with a product or service. High-profile positions in the media typically require them. A television anchorwoman, for example, will typically be contractually bound not to work for a competing news channel in the same market for a period of time following the termination of her contract.

In legal challenges courts use a standard of reasonableness in deciding whether to uphold a noncompete agreement. Most states use a three-part test: the agreement must be reasonable in terms of length of time, size of geographical territory included, and the business's necessity for the agreement. Covenants restricting the sellers of businesses typically receive a lower level of scrutiny, whereas restrictions on the behavior of former employees are closely scrutinized.

Courts are primarily concerned with preventing unfair restraints on trade. In a free market, most businesses cannot reasonably assert a need to restrict competition. Many states will evaluate each separate part of an agreement using the so-called blue pencil doctrine of severability, under which certain parts of the agreement can be upheld as enforceable and others can be found unenforceable. A few states, however, throw out an entire agreement if any part of it is found to be an unfair restraint on trade.

Further readings

Jordan, Thomas E. 1990. "The Application of Contract Law to Georgia Noncompete Agreements: Have We Been Overlooking Something Obvious?" Mercer Law Review 41 (winter).


Restraint of Trade.

References in periodicals archive ?
Elise Cooper, a senior vice president for the company, said they wanted to hire in Boise, but her previous employer had every employee inits Boise office sign a noncompete agreement, without having employees in offices outside Idaho sign a similar agreement.
From the perspective of career management, the mere prospect of litigation over the enforceability of a noncompete agreement can have a "chilling effect" on an individual's willingness to pursue other job opportunities or entrepreneurial endeavors (Marx & Fleming, 2012).
One such contractual restriction that firms and workers often enter into is a noncompete agreement, or covenant not to compete (CNC) clause.
She also notes that a six-month noncompete agreement was enforced and that she complied to avoid legal trouble.
Still, "employers concerned about competition should not wait for a court to decide whether its noncompete agreement is enforceable after a key employee departs for a competitor," Ray wrote.
The Tax Court has found this to be the case where the success of the corporation depended on the shareholder's ability and reputation and there was no noncompete agreement between the shareholder and the corporation.
Valdez signed the noncompete agreement in 1999, when he joined Amazon, according to the complaint, which seeks enforcement of a provision of the agreement requiring an 18-month "time out" before employees can work in comparable positions for competing companies.
When seeking to enforce a disputed noncompete agreement, employers frequently will request a court-ordered temporary restraining order or injunction to enforce the clause, Mr.
139) Courts and commentators in favor of the ban note that, in the law-firm context, a noncompete agreement can be especially burdensome because an existing client is denied the opportunity to continue a close fiduciary relationship with a trusted confidant and counsel.
Crews said in the lawsuit that the company information Henderson received has been used to contact clients and get them to switch to Henderson's new employer, which violates a noncompete agreement he signed at Crews.
We're struggling,'' said Turowski, now a plaintiff challenging alleged wage violations and the noncompete agreement.