A “non-compete agreement” (NCA) is an agreement between an employee and an employer in which the employee promises not to enter into business competition with the employer during or after employment. These agreements are also known as a non- compete clause, non-compete covenant, or covenant not to compete. The employer typically requires the employee to sign an non compete agreement when the employment relationship between employer and employee begins, or at the time an employee is assigned to a position that gives the employee access to proprietary information.
Non-Compete Agreements Explained
NCAs are commonly used by employers in industries and in companies that need to protect business from competition after an employee leaves, particularly in highly technical and innovative industries such as software development. Employers will often use NCAs for certain leadership and occupational categories. Those individuals include executives, managers, and engineers, all of whom are usually privy to the employer’s operations and trade secrets.
Without an non compete agreement, an individual could use their inside knowledge as leverage to get a job with a competitor and cause great damage to the former employer. An employer can require some or all of its employees to sign an NCA as a condition of their employment.
Enforceability Of non compete agreement’s
When determining whether an non compete agreement is enforceable, courts will consider all relevant factors to determine whether the company has a “legitimate business interest” in the NCA’s restrictions. A well-drafted, enforceable NCA must serve a legitimate business interest by setting forth with specificity the terms and conditions concerning the employee’s ability to work with or for the employer’s competitors after leaving the current employer. Those restrictions should be not be heavy-handed– they should be only as prohibitive as is reasonably necessary to protect the employer’s legitimate business interests.
Failure to narrowly draft an non compete agreement risks that it will be found unenforceable in a court of law. Courts tend to look on NCAs unfavorably because the employers usually have the bargaining power advantage. Employees in need of a job are frequently required to sign an NCA in order to gain employment. When an employer seeks to enforce the NCA, courts may view the NCA as unfairly interfering with the employees’ ability to earn a living. Accordingly, employers should get from legal counsel in drafting an enforceable NCA.
Important Tips For Ensuring Your Non Compete Agreement Is Enforceable
Comply with Applicable State Laws on NCAs
Enforceability of the non compete agreement depends on the applicable laws of the state, which may be the company’s headquarters, place of doing business, or the employee’s state of residence. Some states view NCAs as entirely unenforceable, while other states require NCAs to be very limited in their scope. Limitations usually include:
- The NCA must be reasonably limited in terms of its duration. Depending on the industry and the responsibilities covered, six months to two years is usually deemed a reasonable duration. For higher level executives and key personnel, a longer duration may be appropriate.
- The NCA should specify the market that is encompassed by the NCA restrictions and the types of restrictions on job responsibilities that it covers.
- The NCA should specify a geographic location where the restrictions apply. You should limit the geographic area of the NCA to the area where your company ordinarily does its business. For example, a small company that does business usually within one or two states cannot reasonably require the NCA to apply countrywide.
The Employer Should Provide the Employee with a Process for Accepting Employment with Another Employer
If an employer can show the court that it was being reasonable about both its need to protect its business secrets and the employee’s need to pursue career opportunities, the employer will be in a better position in court. As such, the NCA should outline a process in the NCA for the employee to obtain the employer’s permission for accepting employment with another employer.
Conform To The Business Practices In The Industry
To the extent possible, the employer should make sure its NCAs are consistent with what others are doing in the same industry and geographical or market area.
Include A Choice of Law, Venue And Jurisdiction Provision
Include a provision that requires disputes over the enforceability of the NCA to be governed by the laws of a state where NCAs are enforceable. While it is no guarantee that the court will apply that law, the inclusion of such a choice of law provision in your NCA improves the odds that the court will apply that law rather than the laws of a state that are unfavorable to NCAs.
Special Factors Apply
Your NCA is more likely to be enforceable if you can prove that you provided the employee with specialized training or knowledge that should not be used by the employee and the new employer to gain a competitive advantage. Another special factor could be that the employee was so effective at cultivating customer relationships that the employee became a key employee to your customers, who now identify your company through that employee.
Why Employers Implement Non Compete agreement’s
As indicated above, employers like to use NCAs to help prevent former employee(s) from using knowledge gained during employment to help the employer’s rivals or to start a competing business of their own.
NCAs, especially when used in tandem with NDAs, are a good way to protect business secrets concerning such matters as internal operations, customers, formulas, pricing, and business strategies.
Industries And Professions Where Employers Commonly Use Non Compete Agreement
Employees in certain industries and occupations should expect to sign an NCA as a condition to their employment. Those include:
- Media: NCAs are used to help protect market share of a radio or TV station when one of their widely followed celebrities leaves to take a job with a rival station.
- Information technology (IT): IT professionals have significant amounts of proprietary information of the employer.
- Financial services: Banking business interests could be protected using an NCA.
- Executive or Key Manager corporate positions: Executive positions often are privy to confidential information.
- Manufacturing: Many manufacturing companies have proprietary information that could, knowingly or not, be shared with competitors.
- Medical professionals: Many medical professionals sign NCA’s that include not working at rival medical facilities in the same area.
- Sales professionals: Sales professionals are given private information that includes data models, customer patterns, and vendor practices. These are protected with a NCA.
Use NCAs Confidently After Consulting with KPPB
Consult with the labor and employment law experts at KPPB LAW about using NCAs. When properly drafted, an non compete agreement will help protect your market share and your business secrets from your competitors. Let the attorneys at KPPB LAW make sure your NCAs are reasonable and effective. Contact KPPB LAW for more information.