Covenants Not to Compete: Yes, They Can Be Enforceable

22 January 2013 Labor & Employment Law Perspectives Blog

Attorneys are often asked by both employers and executives, “Are these non-competes even enforceable?” In most states, the answer is “yes,” provided they are done correctly. Covenants not to compete and their close cousins, covenants of non-solicitation of other employees or of customers, are creatures of state law. Determining enforceability will require an examination of a particular state’s laws, either by statute or by case law. While the law in California is extremely unfavorable to enforcement of non-competes, most states do allow them and the courts do enforce non-compete agreements. Thus, employment-related covenants can be a powerful weapon to protect the business interests of employers.

To have a valid and enforceable agreement, there generally must be something given to the employee, which is also known as “consideration.” It also is important to note that when binding an employee to a non-compete or non-solicit agreement, the employer need not sacrifice the “at-will” status of the employment relationship. Thus, a full-blown employment contract, with a set term of agreement and a just-cause standard for termination is usually not necessary.

In many states, that consideration can be as simple as the offer of continued employment (e.g., “You get to keep your job if you sign this Agreement.”). In other states, continued employment is not enough. In those states, the Agreement may have to be entered into at the very inception of the employment relationship or, if during employment, some other form of consideration is required to make the Agreement enforceable. This consideration could be a financial or non-financial incentive to sign the Agreement.

Since the law of non-compete is ever evolving, employers who have used such an Agreement should periodically review their Agreement in light of applicable law and enforcement trends. Below is some general guidance for consideration by employers who have used such covenants or may be considering using them:

  • Identify the legitimate business interest the business seeks to protect.
  • Draw the scope both in geographical area and length of time as narrow as is reasonable. In a rapidly changing business and technological environment, an employer is usually hard pressed to come up with a reason why a five-year non-compete is necessary. Six months to two years will be easier to argue.
  • Enforce non-compete agreements when they are breached. An employer who knowingly lets former employees violate their covenants will be hard pressed to enforce those covenants later on.
  • Know what it takes to enforce them. Discuss with your counsel the steps you should be taking now, such as protecting your customer lists and technology, so that, if it is necessary to seek enforcement, sloppy practices and lackadaisical security cannot be used against the company.
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