Just because an employee signs a noncompete agreement does not mean a court will enforce it. Although noncompete agreements are lawful in most states, their enforceability depends on many factors. Here are some key points courts consider in deciding whether to enforce a noncompete agreement.
1. Protectable Interests
To be valid, a noncompete must protect a legitimate business interest. The employer’s trade secrets, proprietary business information, and customer goodwill are “protectable interests” in most jurisdictions. If the employee’s work for a competitor would be unlikely to harm any of these interests, then a court would be unlikely to enforce the noncompete.
2. Ordinary Competition
Courts generally will not enforce a noncompete merely to prevent an employee from bringing basic skills to a competitor. Although the employee may have become skilled through training or experience provided by the employer, this typically does not constitute the “protectable interest” needed to enforce a noncompete.
Has the employee been given something of value (i.e., “consideration”) for signing the noncompete? In many jurisdictions, initial employment suffices. But if the employee was asked to sign the noncompete after a substantial period of employment without being given something above and beyond earned compensation—such as a raise, bonus, or additional benefit—then the validity of the noncompete may be at risk.
A noncompete must be reasonable as to time, geography, and scope. If a noncompete restricts competitive employment for a period of time or in a geographic area that is disproportionate to the interest at stake, then the employee may have grounds for a successful challenge. Similarly, if the noncompete unduly restricts the scope of services that the employee may provide to a competitor, then this, too, may render it unenforceable.
The employee’s signature is critical. Distributing a noncompete but then “letting it slide” if the employee fails to return a signed copy can come back to haunt. In these circumstances, the employee may claim that he or she rejected the noncompete by refusing to sign—and that the company acquiesced by not pursuing the matter further.
6. Changed Circumstances
Some judges have ruled that a material change in employment voids a noncompete. In their view, an employee would not reasonably expect a noncompete to survive a significant change in duties, responsibilities, or reporting relationships. Thus, if a material change occurs, the employee may later defeat enforcement efforts if (a) the noncompete did not by its express terms continue in force and effect or (b) the employee was not required to re-sign an appropriate noncompete when the job changed.
7. Nonsolicitation Restrictions
Restrictions on soliciting clients should be tailored to the clients the employee served in the course of his or her employment. Otherwise, the restrictions may be invalidated as exceeding reasonable measures to protect client goodwill or as vague.
A court will not issue an injunction to enforce a noncompete unless the harm to the employer if the injunction were not issued would outweigh the harm to the individual if the injunction were issued. In undertaking this “balance of hardships” analysis, courts consider fairness. Sometimes noncompetes that are valid on their face go unenforced because a court finds the restrictions to be unfair under the circumstances.
9. Judicial Modification
What if some portions of a noncompete are enforceable but others are not? Depending on the jurisdiction, the court could either (a) invalidate the entire noncompete because of one or more unenforceable provisions; (b) strike out the unenforceable language from the noncompete, leaving the rest intact; or (c) modify the unenforceable provisions, such as by ruling that a three-year restrictive period will be reduced to two years. It is important to know how this is handled in your jurisdiction.
In many states, noncompetes are prohibited as to certain employees by law or rules of professional conduct. For example, in Massachusetts, such employees include physicians, nurses, social workers, broadcasters, and lawyers. It is important to become familiar with any special rules that might apply to your industry.
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Because this is a highly nuanced area of the law, both employers and employees alike should consult with experienced employment counsel when drafting, reviewing, implementing, or handling disputes concerning noncompete agreements, nonsolicitation agreements, or other post-employment restrictive covenants.