Articles

Non-Competition Agreements and the Law

TO COMPETE OR NOT TO COMPETE

It is nothing new for employers to require employees to sign noncompetition agreements, but such agreements are now more commonly used by all types of employers and for a broader range of employees. They are especially popular among high-tech and Internet businesses, where the risks of being at a competitive disadvantage are most significant when a departing employee exploits the former employer's "trade secrets." In these fields, the traditional criteria used by the courts in judging the reasonableness of an agreement--the geographic and time limits of the restrictions--may have reduced relevance. As a result, the strategies used by employers to protect their interests, and by employees to protect theirs, are still evolving.

Employers can enhance the prospects for court approval of a noncompetition agreement by customizing it to fit the particular business and job in question. The agreement should restrict the former employee no more than is necessary to protect the employer's legitimate business interests. Requiring noncompetition agreements only of employees with access to sensitive information may also improve their enforceability. Given the variation in the states' treatment of such agreements, employers with a presence in more than one state should draft agreements very carefully.

The scope of a noncompetition agreement generally depends on its terms. Courts in some states, however, have accepted the argument that, even if an employee is not barred from working for a competitor by the language in the agreement, such competition should be prohibited on the ground that the employee inevitably will make use of a trade secret of the former employer. Other courts have been less willing to make that assumption. For example, in one case a court held that an agreement did not apply to a departed employee because the new employer was not a "competitor" as defined in the agreement. Finding no prohibition against the former employee's new job in the noncompetition agreement itself, the court refused to rewrite the agreement or to let the former employer "make an end-run" around the agreement in the guise of preventing the disclosure of trade secrets.

From an employee's perspective, the argument can often be made that a noncompetition agreement should be enforced for a shorter time period than used to be considered reasonable. This is especially true in information technology, where the technology itself and the competitive dynamics change rapidly. As for the secrets that the employer may be attempting to protect by enforcing the agreement, the employee sometimes can counter that the information is already in the public domain, giving the former employer no right to prevent the former employee from using it in a new job.