EMPLOYEE NONCOMPETITION AGREEMENTS
Posted: 7/25/2007 11:48:11

EMPLOYEE NONCOMPETITION AGREEMENTS
by
William D. Harazin
Attorney at Law
Copyright, 2007
All Rights Reserved

In today’s information society, every organization, large and small, new and old, develops and maintains a considerable amount of information about its products, its business, its market, and its competitors. This information, often times confidential and proprietary, is then used to gain a competitive edge over one’s competitors in the market place. As such this information becomes a valuable asset of the organization, which, if not protected, may be lost, or worse stolen.

The problem arises when an individual, who for what ever reason had legitimate access to such information, turns around and without consent, uses the information for one’s own use to the detriment of the organization. This can occur when a seller of a business continues in the same business and competes against the buyer, or when a trusted employee leaves the organization to compete with the former employer. In either case, the unprotected information of the organization is being taken, perhaps unfairly, to gain a competitive advantage over the organization.

An organization can take precautionary measures to prevent this unauthorized use of its information. For some information, the organization may obtain protection through the use of statutory protections such as patents, copyrights, and trademarks. For other information, trade secret laws may come into play. However, much of the information which an organization may consider confidential and proprietary, may not in fact be protectable through the foregoing methods, or for that matter be confidential and proprietary information. Nonetheless, such information would still be valuable in the hands of a competitor.

An alternative measure to protect against the unauthorized dissemination and use of the organization’s information is through the use of restrictive agreements. These agreements, commonly known as “Noncompetition Agreements”, are designed to restrict an individual from unfairly competing with the organization. Restriction of competition is generally frowned upon by the courts, however, in these situations the courts will enforce noncompetition agreements if they are reasonable.

Specific rules apply to noncompetition agreements as they apply to employees. Though State law may differ most State laws and Court cases generally recognize and permit the use of noncompetition agreements in the employer-employee context. Noncompetition agreements between employers and employees typically will be valid and enforceable if they are: (1) in writing; (2) made a part of the employment contract; (3) based on valuable consideration; (4) reasonable as to both time and territory; and (5) not against public policy.

The writing requirement is satisfied by a written agreement signed by the employee, who has agreed not to compete. This written agreement not to compete must be a part of the employment contract and cannot stand by itself. It does not, however, have to be physically within any written employment agreement. It merely needs to be a part of the contract to employ the individual. Even so, the noncompetition agreement should be discussed with the employee prior to employment and not just inserted into an employment agreement. To do otherwise, would give rise to an argument against enforceability because the employee was uninformed of the noncompetition agreement.

In any given contract the parties must exchange consideration. This means the parties must give up a right, property or promise, and obtain in return some right, property or promise from the other party. The exchange of valuable consideration must be present for a noncompetition agreement to be valid and enforceable. Ordinarily the employment, itself, is the valuable consideration, if the agreement not to compete is entered into at the time of employment. Thus the employee is giving up something of value (the right to compete), in return for something of value, (employment).

However, if the individual is already employed by the organization, any promise by the employee not to compete must be supported by additional consideration. The additional consideration over and above employment itself, may be a promotion, pay raise, additional vacation, or some other benefit to the employee, which the employer was not previously obligated to provide, or to which the employee was not previously entitled.

Care must be given if an organization is relying on “employment” as consideration. Allowing an employee to start work prior to signing the written noncompetition agreement may provide an argument against enforceability. The employee could argue that “employment” did not satisfy the consideration requirement since the employee was already working prior to signing the noncompetition agreement, and thus additional consideration was required. Having an employee sign the noncompetition agreement at the same time as the other pre-employment documentation such as W-4s, I-9s and insurance forms, is generally acceptable.

The reasonableness of the restrictions in the noncompetition agreements are the source of the most debate on the enforceability of any specific noncompetition agreement. The restrictions on an employee’s ability to compete, and thus in many cases his ability to work, must not only be reasonable, but they cannot be more than are reasonable to protect the organization’s interest. Though restriction of employee’s ability to compete in a terms of time and territory may be necessary to prevent an employee from hurting the organization’s business, restricting an employee of a business local in nature from competing anywhere in the United States for the rest of the employee’s life is more than necessary to keep the employee from hurting the organization’s business.

Determination of the reasonableness of a particular time or territory restriction is not easy and depends on the circumstances, including the type of business, the existing market of the organization, the employee’s territory within such market and the nature of the industry to name a few. The courts have generally upheld one to two year restrictions on an employee’s ability to compete. Enforceability of longer periods would depend again on the circumstances. With respect to territory, an organization cannot be over-reaching in trying to prevent an employee from competing. Such restrictions should have some relation, not only to the business of the organization, but also to the role of the employee in such business.

Finally, the noncompetition agreement can not be against public policy. The agreement must be designed to protect the legitimate business interest of the organization. If it is not, then it is against public policy and unenforceable. Protecting information, confidential in nature, obtained by virtue of the employment relationship is a protectable and legitimate business interest. These protectable interests are much broader than trade secrets and confidential information. They include protection of the organization’s goodwill and customer relationships, which are viewed as valuable assets of the organization even though the employee worked at creating and maintaining them. Even if the restrictions are designed to protect a legitimate business interest, it may still be unenforceable due to other over-riding public policies such as public health or welfare.

A noncompetition agreement with an employee, which satisfies the five requirements, is a valuable tool in protecting the organization’s business and information from a departing employee. The organization, upon a finding of validity, can ordinarily obtain a court order preventing the employee from competing as required in the noncompetition agreement. The court order thereby protects the organization from the employee, who attempts to gain an unfair competitive advantage through the unauthorized use of the organization’s information and methods of business.