Non-Compete Agreements: What is Enforceable? What is Reasonable?

From Crain’s Chicago Business:

“The non-competes, thought to be some of the most stringent in the business world, prohibited sandwich makers for a period of two years after leaving the company from working at any establishment within a 2-mile radius of a Jimmy John's restaurant that made more than 10 percent of its revenue from sandwiches.”

In the case of the sandwich shop, much like in the case of many businesses, the non-complete existed to protect trade secrets (recipes like the tuna salad) and prevent employees from working for a direct competitor (two-mile radius). However, Jimmy John’s was unique in the case that it imposed a non-compete on low-wage workers making and delivering sandwiches.

Many states, regulators, and representatives have attempted to heavily regulate the use of non-compete agreements. According to the Treasury Department, one in seven Americans earning less than $40,000 a year is subject to a non-compete, and roughly 37 percent report having worked under a non-compete agreement at some point during their career. But non-compete agreements still have value to many businesses, so long as they are enforceable, reasonable, and are designed to protect important information that would be detrimental if it were to be in the hands of a competitor.

For many industries and job functions, non-compete agreements are absolutely critical to the economic future of a business. However, employers need to take steps to ensure a non-compete will hold up to the intense scrutiny that it will face in the event of a legal challenge, and that the non-compete will not place your company in the crosshairs of the media for its ‘unfairness’ to employees (See: Jimmy John’s above, Amazon’s backlash for requiring even temporary workers to sign non-compete agreements).

In order to be considered valid, a non-competition agreement must:

- Be supported by valid or adequate consideration at the time it is signed;
- Protect a legitimate business interest of the employer; and
- Be reasonable in scope, geography, and time.

According to Inside Counsel, like all other contracts, restrictive covenants (including non-compete agreements) must be supported by adequate consideration at the time they are executed. What constitutes adequate consideration for a restrictive covenant, however, varies from state to state. As a result, understanding in which state a particular non-compete may need to be enforced and ensuring at the outset that adequate consideration has been provided to the employee under the law of that state are key to having enforceable restrictive covenants.

Depending on the state, valid consideration can be as little as ‘continued employment,’ according to a 2015 article on the American Bar Association website, featuring a table on state-by-state decisions on the topic. Currently, however, Connecticut, Minnesota, Montana, North Carolina, Pennsylvania, Texas (only if employment is at will), Washington State, West Virginia, and Wyoming have case law providing that continued employment does not constitute valid consideration for a non-compete agreement. 

According to the Inside Counsel article, one potential solution is to not rely solely on continued employment as consideration. Instead, a company seeking to minimize consideration issues can provide an existing employee additional, material consideration directly related to the non-compete. This additional consideration can often come in the form of increased compensation, such as a raise and increased base salary, a signing bonus, or eligibility for annual performance or other bonuses. Consideration for restrictive covenants, however, does not need to be monetary. Additionally, non-monetary consideration can include a promotion or new title, access to confidential or trade secret information, additional job training, continued or new access to customer relationships, or (for an at will employee) a fixed term of employment.

Law++ took a look at the phrase ‘legitimate business interest’ as part of a non-compete agreement, highlighting two primary areas that constitute a legitimate business interest:

- Customer Relations: Customer relations are a widely accepted legitimate interest of the employer. That said, interference with this interest could occur if that employee had close personal contact with the customers and [the customer] would have reason to trust or follow that employee.
- Trade Secrets: It is also widely accepted that the protection of trade secrets is a legitimate interest. In these circumstances, the court will look to whether or not the employee had access to these trade secrets and if the non-compete prevents employment in a position where this knowledge would not harm the employer.

One of the most scrutinized parts of a non-compete is the reasonableness of time and scope. Noting this, the employee has the burden of proving that a non-competition restriction is unreasonable, and the reasonableness determination is very fact-specific. According to Bernstein Law, the validity of the restrictions will be governed by the type of interest protected, and factors exclusive to an industry or even a particular business may drive the determination. 

For example, in traditional industries where development of client relationships may take years, a non-compete agreement of a year or more, may be considered reasonable. However, in industries where the technology or information rapidly changes or becomes public, that same time frame may be unreasonable. 

Likewise, the geographic scope of the restriction must be reasonably related to the employer’s interest and the harm that the employer may suffer from a breach. So a reasonable limitation on a salesperson may be a particular territory, or even specific customers, rather than a nationwide ban.

For many companies, non-compete agreements are a necessary part of an employment agreement. Similarly, for employees, getting out of non-compete agreements is sometimes necessary to earn a living or build a career. In either event, an experienced employment attorney should be consulted. To obtain help or advice with a non-complete agreement or any other employment issue, find an experienced attorney by quickly posting a short summary of your legal needs on www.legalserviceslink.com, and let the perfect attorney come to you!