Employers and executives often question the enforceability of noncompetition agreements. In most states, covenants not to compete and covenants of non-solicitation of other employees or customers are enforceable if they are drafted correctly. State law governs the enforceability of noncompetition agreements and, while California is notoriously unfavorable to such agreements, most states do allow them and the courts will enforce them. Thus, these covenants can be a powerful weapon to protect employers’ business interests.
A valid enforceable agreement must be accompanied by consideration, i.e. something must be given to the employee in return for the employee agreeing to the non-compete or non-solicit covenant. An employer need not sacrifice the “at-will” status of the employment relationship by providing an employment contract with a set term and just-cause termination clause. Rather, in some states, consideration can simply be an offer of continued employment. Other states may require that the agreement is entered into at the inception of the employment or, if during employment, that the employer provide some other form of consideration such as a financial or non-financial incentive.
Non-compete law is constantly evolving and employers who use non-compete and non-solicit covenants should periodically review their agreements for compliance with applicable law and enforcement trends. Below is some general guidance for employers who have used or are considering using such covenants:
- Identify the legitimate business interest the business seeks to protect.
- Keep the geographical scope and length of time of the covenant as narrow as is reasonable – it is easier to argue for six months to two years than five years in a rapidly changing business and technological environment.
- Enforce non-competes when they are breached – it will be difficult to enforce covenants later if you knowingly allowed violations in the past.
- Discuss with your counsel the steps you should be taking now, such as protecting your customer lists and technology, to make enforcement more likely in the future.