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Non-compete Agreements: An Overview

by Vinay Jain Non-compete Agreements: An Overview

Are non-compete agreements an unfair restraint on the ability of workers to move freely between jobs, or are they necessary to ensure that business don’t lose trade secrets and other valuable confidential information to competitors?

That was the question taken up recently by the Massachusetts state legislature after the governor proposed a set of legislative reforms that would have effectively banned non-compete agreements in the state.

On one side of the debate was Massachusetts’ sizable high-tech startup community, which tends to regard non-competes as a barrier to innovation — for example, a non-compete might effectively prevent a programmer at a big tech company to leave his job to launch a startup in a similar field. On the other side were more traditional business interests, concerned about exposing their sensitive information every time an employee leaves for a competitor. 

What is a Non-Compete?

Non-compete agreements, sometimes called “covenants not to compete,”  are contractual agreements between an employer and employee (or, less frequently, between a client and an independent contractor) which limit the worker’s ability to work for a competitor after leaving his or her current job, usually for a specified duration of time (e.g., two years).

The enforceability of a non-compete depends on how it is worded and in what state it is being applied. Courts in some states enforce non-competes broadly, whereas others require non-competes to be more narrowly tailored.1  A handful of states, most notably California, will not enforce non-competes in most cases.

Employers: Should You Have Your Employees Sign a Non-Compete?

Just because you operate in a state where non-competes are legally enforceable, it doesn’t mean it’s necessarily a good idea to require your employees to sign one. First, non-competes have the potential to scare away good new hires. Talented people tend to want to keep their options open, and the prospect of having their hands tied from a professional standpoint for months or even years after they leave a job can be a deal-breaker. The prospective employee might also wonder why you feel that you need to have your people sign a legal contract to keep them from jumping ship. 

Non-competes have the potential to scare away good new hires. Talented people tend to want to keep their options open, and the prospect of having their hands tied from a professional standpoint for months or even years after they leave a job can be a deal-breaker. 

If you’re considering having your employees sign a non-compete, the first question to ask yourself is, what specifically are you worried about? The more you can tailor your non-compete so that it addresses your concerns but isn’t overly broad, the greater the chances that it will be enforceable in most jurisdictions.

Generally, non-competes should be reasonable in scope, duration and geographic reach. For example:

  • Scope – Are you concerned about a former employee working at at a competitor in any capacity, or is your concern limited to the specific roles and responsibilities the employee had while with you? Most likely it’s the latter, and if so it’s better to be specific about that in the non-compete. Similarly, if you’re only concerned about the employee working at particular companies and not in the industry as a whole it can be helpful from an enforceability standpoint to be specific.
  • Duration – If you work in the high-tech sector, where technology advances at a rapid pace, it could be hard to justify a non-compete that lasted, say, three years, since the technological know-how that the employee took from your company would likely be outdated before then. In a slower-moving industry, however, it’s possible that a relatively longer duration might be reasonable.
  • Geographic reach – If you have a local business, it probably isn’t reasonable for you to try to restrict your former employee from working at a similar business on the other side of the country. On the other hand, if you’re concerned about them working for a competitor in town, that could be a legitimate geographical restriction.

Another factor to keep in mind if you’re considering asking your employee to sign a non-compete is timing. Often the agreement is signed at the time of hiring; however, if the employer asks the employee to sign a non-compete after employment has begun, then the employer typically must pay the employee some additional compensation (say, in the form of a severance package) in order for the non-compete to be enforceable. 

Employees: Should You Sign a Non-Compete?

If you’re asked to sign a non-compete as a condition for a job offer, you may feel like you don’t have much choice in the matter. But it’s important to read the non-compete language carefully and understand what you’re actually committing to. Having an employment attorney review the language can be a very smart investment.

If you’re uncomfortable with the breadth of the non-compete – whether in scope, geographical reach or duration – you should ask the employer: What specifically are you worried about? You may find, for example, that even though the non-compete they put in front of you is broadly worded to include any competitor in the industry, in fact they are only worried about you working for a specific competitor or set of competitors. In that case, try to work with them to change non-compete so that it lists those specific competitors instead of stipulating a general prohibition. 

If you’re uncomfortable with the breadth of the non-compete – whether in scope, geographical reach or duration – you should ask the employer: What specifically are you worried about?

If you’re being asked to sign a non-compete at the end of your employment, say as part of a severance package, and you’ve already lined up a new job, or have one in mind, then it may be a good idea to ask the employer to acknowledge in writing that your new company and position will not violate the non-compete before you sign it.

There are Other Options

It is also worth remembering – and maybe reminding your employer – that the non-compete agreement is not the only tool in their toolbox for protecting sensitive information. Non-disclosure agreements, invention assignment agreements, non-solicit agreements and trade secret law can all help assuage the concerns of employers, while potentially creating fewer enforceability issues. 

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Although the policy debate over the benefits versus harms of allowing non-compete agreements is unlikely to abate anytime soon, it’s important to understand the basics of non-competes, whether you’re an employer or employee. 

  1. See generally Chris Montville, Reforming the Law of Proprietary Information, 56 Duke L.J. 1159, 1180 (2007). Available at http://scholarship.law.duke.edu/dlj/vol56/iss4/4/
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Vinay Jain

As Chief Legal Officer, Vinay serves as Shake's general counsel, is responsible for the company's legal contracts and content, and leads efforts to educate consumers and small businesses about the law.

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