Noncompetition Agreements


The desire of employers to keep their employees from competing with them has been a source of much litigation. In a typical arrangement, the employer requires the employee to sign an agreement that prevents the employee from engaging in specified forms of competition with the employer for a certain time period and in a specific geographic area. Courts usually will enforce the noncompetition agreement if it strikes a reasonable balance between protecting the interests of the employer and allowing the employee enough leeway to earn a living.

Validity and Enforcement

A challenge to the validity and enforcement of an agreement often focuses on the reasonableness of the geographic scope and the duration of the restrictions. Another factor considered is the nature of the former employee's duties and whether those duties increase or diminish the possibility of competitive harm to the employer. An extensively trained employee who has access to trade secrets or who has developed substantial contacts with customers poses a greater competitive threat than a worker who has few connections to the company's place in competitive markets.

Blue Pencil Rule

If it is determined that a noncompetition agreement is too restrictive, some courts may take a flexible approach. Under the "blue pencil" rule, a court can preserve acceptable parts of the agreement and enforce offending provisions with appropriate modifications. For example, a five-year ban on competition may be enforced for only three years. Or, a five-state, no-competition area may be reduced to the state where the employee worked.

At-Will Employees

Sometimes the legality of a noncompetition agreement is before a court not because the employer is enforcing it but because it fired an employee who refused to sign the agreement. In that setting, the law generally favors the employer's right to discharge an "at-will" employee for any reason or for no reason at all. An at-will employee is one hired for an indefinite term and not protected by contractual or statutory provisions requiring that there be a good reason for termination. An employee who balks at signing a noncompetition agreement may argue that termination for that reason goes against a public policy that prohibits unreasonable restraints on trade. On a case-by-case basis, many states have carved out specific public policy exceptions to the at-will rule, but the exceptions tend to be created in piecemeal fashion and based on policies derived from state law.

Be sure to seek the advice of legal counsel whenever drafting or signing a noncompetition agreement.