Is Your Non-Compete Enforceable?
What is a Non-Compete?
A covenant not to compete is a contractual obligation between an employer and employee or contractor, by which the employee or contractor agrees not to work for competitors of the employer or to open a competing business after the employee or contractor completes their service. Restrictions to compete can be for a specific amount of time, in a specific field, and a specific geography.
When is it useful?
Non-Competition Agreements, or non-compete clauses can help a company retain valuable employees, protect confidential information, such as its intellectual property or its trade secrets and customers, and prevent unfair competition.
Why my non-compete may not be enforceable?
However, non-competes are a severe restriction on commerce and an individual’s ability to find employment or work to make a living. For this reason, there is a trend towards limiting the enforceability of such clauses. The enforceability of such clauses varies a lot depending on the jurisdiction and differences may even exist within a jurisdiction (for example different rules exist from State to State in the United States).
What to consider to ensure a non-compete’s enforceability?
As a general rule, in order to be enforceable, a non-compete needs to be reasonable.
While the exact conditions and appropriate wording of a non-compete will highly depend on the jurisdiction and local standards, the following general guidelines should be taken into consideration to ensure reasonableness and enforceability of a non-compete:
Essentially, this means that the employee/contractor should obtain something of value in exchange for his or her agreement not to compete. Consideration can be in the form of payment of money or something else of value. For newly hired workers, the employer’s willingness to hire the individual can be indicated in the agreement as the value exchanged for the worker’s agreement not to compete. However, for existing or outgoing workers, additional consideration is required to make an agreement enforceable.
To be reasonable in scope, the non-competition should be designed to protect legitimate interests of the employer. It therefore needs to be reasonable with regard to:
Depending on the type of work, competition could be restricted for a specific business or industry.
The restriction to compete should last for a reasonable amount of time, which depends on the fact and circumstances of each case and will vary depending on the type of work and industry.
While a prohibition to compete for the rest of a worker’s life will most probably not be enforceable, in many industries, a non-compete with a duration of 6-months will be considered reasonable, and therefore enforceable. The general rule is that the duration of the agreement should not exceed the time reasonably required for protecting the employer’s legitimate business interests.
Non-competes oftentimes describe a restricted area in which the employee or contractor cannot compete. Again, what is considered reasonable in terms of geographical restriction will depend on the fact and circumstances of each case.
Agreements that prohibit workers from competing within a few kilometers of the employer’s place of business are often enforceable, agreements restricting a worker from competing anywhere in the world are usually not enforceable.
Appropriate choice of law provision
Since the enforceability of non-compete provisions is highly dependant on the jurisdiction, it is important to provide for the appropriate law to govern the agreement. Enforceability, as well as available remedies in case of breach, can be different from jurisdiction to jurisdiction and this should be addressed.
Example: Bob the Software Engineer
Bob works as a software engineer and has been offered an independent contractor agreement by Automotive Corp for the development of a software for self-driving cars that comprises a non-compete.
The non-compete clause provides that Bob is restricted from performing any services as an engineer, whether indirectly or directly competitive with his employer, for five calendar years post-employment and without a geographic limitation.
Ultimately, this would mean that Bob is not allowed to work as as a software engineer in any capacity for five years. This appears unreasonable and unnecessary to properly protect legitimate company interests.
However, in case the non-compete prohibits to work in the field of software engineering for self-driving cars, for a direct competitor during 6-months following employment and within the same state, this would seem more reasonable and therefore enforceable.
Usually, non-competes are used in conjunction with Confidentiality Agreements (or Non-Disclosure Agreements) to keep the business’ proprietary information secret. For more information, please click here.