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Noncompete Basics For Your Business

Posted by Attorney Stephen Hance | Mar 29, 2013 | 0 Comments

Courts generally enforce reasonable non-compete agreements when necessary to protect particular employer interests. But courts will not enforce non-compete agreements when no real protectable interests are at stake, the restrictions are unreasonable, or the employer has undermined its ability to enforce them by, for example, engaging in “selective enforcement” of such agreements.

A non-competition agreement is a type of “restrictive covenant,” i.e., a promise by an employee not to engage in certain behavior that is contrary to the employer's interests. A covenant “not to compete” generally is a promise that the employee will not engage in business competitive with the employer during and for a certain time period following termination of employment. Such covenants are often accompanied by covenants “not to solicit” the employer's customers and covenants “not to disclose” the employer's confidential business information.

To be enforceable, a non-compete must be (i) necessary to protect certain employer interests, (ii) reasonable in time and scope, (iii) consistent with public interest and (iv) supported by consideration. Courts recognize two key protectable employer interests: an employer's relationship with customers, clients and vendors (also called “good will”) and trade secrets and other confidential business information.

Before requiring an employee to sign a non-compete the employer should ask itself: Will this employee control customer relationships and/or have access to confidential business information? Will the employee be in a position to harm the employer's business if the employee were to use the good will or confidential information on behalf of a competitor? If the answer to both questions is yes, then the employer should consider whether covenants not to solicit customers and not to disclose confidential information are adequate to protect the employer's business interests, or whether it is necessary for the employer to restrict the employee from even working for a competitor.

That is not always an easy line to draw, and the unnecessary and overly broad use of non-competes may negatively impact an employer's ability to enforce such an agreement when it really matters. If every employee from the night janitor to the CEO is expected to sign a non-compete, a court may question whether any protectable interests are truly at stake.

About the Author

Attorney Stephen Hance

Steve represents and advises clients that are dealing with business and real estate disputes. Steve is an investor and business owner, and his approach is unique from other attorneys.

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