Non-compete agreements are contractual restrictions that control employees’ future ability to work for competitors of their current employers, who seek to protect their financial interests and trade secrets. While employers traditionally reserved non-compete agreements, or restrictive covenants, for high-level employees whose departures could present a fiscal impact to the company, non-compete agreements are now common with various levels of employees.
However, not all non-compete agreements are enforceable. Whether a court will enforce a non-compete agreement depends on the subject employee and the imposed restrictions. First, the employer must determine whether the employee poses a risk, and is in possession of trade secrets or confidential information that gives the employer a competitive advantage. If so, the employer must then consider the reasonableness of the restriction as it relates to the duration, scope, and geographical area.[1] For example, the duration of the non-compete restriction should not be excessive compared to the value of confidential information the employee might possess.[2] Further, the scope of duties restricted and the geographical area to which those restrictions apply should be limited to the extent necessary to protect the employer.[3]
Employers should also consider public policy and the laws of applicable jurisdiction, which may weigh heavily on the decision to include a choice of law or forum selection clause. Delaware and California are stark examples of the differing jurisdictional approaches to enforcing non-compete agreements.
In Delaware, the court views restrictive covenants through a contractual lens and will generally enforce reasonable non-compete agreements. Delaware’s public policy respects the freedom to contract, with very limited exceptions, as its courts “respect[] the right of parties to freely contract and to be able to rely on the enforceability of their agreements. . . . [O]ur courts will enforce the contractual scheme that the parties have arrived at through their own self-ordering . . . Upholding freedom of contract is a fundamental policy of this State.”[4] If Delaware courts find an agreement to contain unreasonable terms, the court may choose to invoke the “judicial blue-pencil” to modify the agreement, rather than void it altogether.[5]
In California, public policy prohibits any restraint on employment based on non-compete agreements. Section 16600 of the Business and Professions Code deems void any kind of contract to the extent it restrains anyone “from engaging in a lawful profession, trade or business of any kind.”[6] California does not consider whether the parties had adequate consideration or whether the terms were reasonable. “The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of employers.”[7] Although California is an at-will employment state, courts have found employers liable in tort for terminating employees who refused to sign a non-compete agreement.[8] The public policy concern with non-compete agreements is very strong; California courts have even voided non-compete agreements between out-of-state employers and employees that leave to work in California.[9]
These are just two different states’ approaches to enforcing non-compete agreements. Each state’s laws and the facts of each case will determine the enforceability of each respective non-compete agreement. These are just a few considerations for a lawyer preparing a non-compete agreement.
Regardless of how reasonable or well-drafted the non-compete agreement may be, the employer must have an action plan in the event an employee breaches the non-compete agreement. Cases involving the violation of non-compete agreements rarely proceed to trial. Thus, counsel should inform employers of all available remedies and consider the strategic effect that requests for injunctive and interim relief will have on the ultimate case disposition.
[1] See generally, e.g., Coady v. Harpo, Inc., 719 N.E.2d 244, 250 (Ill. App. Ct. 1999); Norman D. Bishara et al., An Empiracle Analysis of Noncompetition Clauses and Other Restrictive Postemployement Covenants, 68 Vand. L.J. 1, 28-35 (2015) (addressing the reasonableness requirement for restrictive covenant enforcement).
[3] See generally Philips Elecs. N. Am. Corp. v. Hope, 631 F.Supp.2d 705, 715 (M.D.N.C. 2009); Nev. Rev. Stat. § 613.200 (2017) (some states require the non-compete agreement to have valuable consideration and reasonableness pertaining to duration and scope, which is combined with the geographical area).
[4] Ascension Ins. Hldgs., LLC v. Underwood, No. Civ. 9897-VCG, 2015 WL 356002, at *4 (Del. Ch. Jan. 28, 2015).
[5] See e.g., Del. Exp. Shuttle, Inc. v. Older, No. Civ.A. 19596, 2002 WL 31458243, at *13–14 (Del. Ch. Oct. 23, 2002) (adjusting a three-year time limit to a more reasonable “two-year duration” and imposing a geographical limitation where there was none).
[6] Cal Bus. & Prof. Code § 16600.
[7] Application Group, Inc. v. Hunter Group, 61 Cal. App. 4th 881, 900 (1998).
[8] D'sa v. Playhut, Inc., 85 Cal. App. 4th 927, 929, 934 (2000) (“[A]n employer cannot lawfully make the signing of an employment agreement, which contains an unenforceable covenant not to compete, a condition of continued employment.”)
[9] See Application Group, Inc., 61 Cal. App. 4th at 899-900 (striking down a Maryland employer’s non-compete agreement with a former employee who moved to work for a California employer).