Can a Non Compete Agreement be enforced against an employee?

Employers frequently require their employees to sign a Non Compete Agreement - also known as a Covenant Not To Compete. The laws on these agreements vary somewhat from state to state, but the courts in most states look at similar issues. In general, courts do not favor this type of agreement because they tend to be in restraint of trade. Nevertheless, courts do recognize that a non compete agreement may be necessary to protect an employer's customer lists and competitive positioning if the employer can establish that:

• The agreement is supported by consideration, that is, the employee received something of value in exchange for signing,
• The employer has a legitimate business interest in requiring the agreement, and
• The restrictions of the agreement are reasonable as to time and place.

Consideration

Consideration is a necessary element of every contract. The consideration for a non compete agreement may vary depending upon whether the agreement is signed before or after employment.

If the agreement is signed before employment, the employer can easily establish that the consideration is the employment itself.

If the agreement is signed after employment, the states vary on whether it is necessary to establish consideration by increased pay, promotion or some additional increase in value to the employee. Nevada has a strong policy favoring the concept of "employment at will." This means that in the absence of an employment contract for a specific term, either the employer or the employee can terminate the employment relationship at any time without cause. In Nevada, therefore, the Supreme Court has held that the mere fact of continued employment is sufficient consideration to support the Non Compete Agreement.

Legitimate business interest

Many states consider the preservation of customer relationships and protection of trade secrets to constitute a legitimate business sufficient to sustain a non-compete agreement.

In Nevada the Supreme Court has stated that "Where the public interest is not directly involved, the test usually stated for determining the validity of the covenant as written is whether it imposes upon the employee any greater restraint than is reasonably necessary to protect the business and good will of the employer."

In that regard, it is interesting to note that the Court partially refused to enforce a non-compete agreement signed by a doctor with a rural medical clinic because the doctor was the only certified orthopedic surgeon in the town. The court allowed him to continue practicing his orthopedic specialty while prohibiting him from maintaining a general practice.

Reasonableness

Often a determining factor in enforceability is whether the terms of the restrictions are reasonable as to the period of time in which the restraint is to last and the territory which the restraint covers. This decision can obviously vary from one state to the next and from one case to the next.

There is no inflexible formula for deciding the question of reasonableness. However, because the loss of a person's livelihood is a very serious matter, post employment anticompetitive covenants are scrutinized with greater care than are similar covenants incident to the sale of a business. In one case the court refused to enforce a non-compete agreement where the term was 5 years and the area was a 100 mile radius. In another case the court modified an agreement which had no time limit and a 100 mile radius and substituted a one year time limit within the city limits. In still other cases the court has refused to enforce a non-compete agreement where any part of the agreement was considered unreasonable.

Remedies

If a court does determine a non-compete agreement to be enforceable, it will usually enforce the agreement by issuing an injunction to prohibit the employee from acting in breach of the agreement. The court might also award money damages, as well as attorneys fees and costs of court.

Sale of business

A covenant not to compete may also be made part of a sales agreement for a business. In this case the courts are more likely to enforce the agreement because there is a strong business interest in preventing the former owner of a business from competing with the buyer who has just bought the business. The standards of reasonableness still apply, but the courts are more likely to find that the agreement is reasonable. This type of breach tends to offend traditional notions of good faith and fair play.

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