Often times business owners and employees are presented with the issue of whether or not a non-compete agreement is enforceable. This can be a tricky question to answer and can lead to much headache and hefty legal bills no matter what side of the fence you are on.
The Time And Scope of Non-compete Agreements
There are two basic categories of non-compete agreements: those pertaining to the sale of a business and those specifically targeting an individual or employee. Fortunately, when it comes to the enforceability of either type of non-compete, there is one broad legal principal that applies to both. In general, for any non-compete to be enforceable it must be reasonable in time and geographical scope. The “time” aspect deals with the duration of the non-compete period. The “scope” aspect relates to the “non-compete radius,” or rather the geographic area in which there can be no competition. However, the real question is what is “reasonable” when it comes to time and geographic scope. Unfortunately, there is no definitive answer that applies in every situation. How the courts define “reasonable” is entirely dependent on the facts and circumstances of each case. What may be reasonable in one situation could be unreasonable in another. Nevertheless, there are a few basic principles that, if carefully reviewed and applied beforehand, will help ward off issues later down the road.
The Balancing Act of Non-compete Agreements
With any non-compete agreement, when determining its enforceability, the court undergoes a balancing act of weighing the need to enforce the agreement as written while at the same time bearing in mind the public policy issues behind not enforcing the agreement. Typically, when it comes to the sale of a business, the need to enforce the agreement and thereby protect the buyer is outweighed by the public policy aspect of allowing the seller to carry on his/her trade in another location. Most businesses are built upon goodwill and client loyalty. Because such goodwill and loyalty was likely built up by the seller well before the sale of the business, a non-compete is an essential tool necessary to give the new business owner an opportunity to take over the business and establish a relationship with and thereby retain existing clients. If the seller was permitted to go across the street and open a competing business, clients would simply follow the seller and the buyer would not get the chance to earn those clients’ business. For this reason, the courts agree that the seller can be restrained from opening a competing business within a specified geographic area and for a specified period of time.
Again, what is “reasonable” with regards to the geographic scope and non-compete period is entirely dependent on the nature of the business and the facts and circumstances surrounding the business. If the business is heavily dependent on existing clients and has been around for a long time, the courts are more likely to enforce a non-compete which has a greater duration and broader geographic radius. If a business is located in a densely populated area which already contains lots of other competitors, the courts may limit the time and scope. At the end of the day, the courts will analyze the legitimate business interest to be protected verses the public policy interest of allowing the seller to carry on his/her business in a location, and at such time, as will avoid doing harm to the buyer.
When it comes to non-competes for specific employees, the rules change a bit. The general rule of reasonable time and scope still applies. However, it is how the courts apply the general rule that changes. Typically, when dealing with the enforceability of a non-compete against a specific employee, courts are much more hesitant to enforce the non-compete agreement. More often than not, courts severely limit the enforceability of non-competes against employees or throw the agreement out entirely. Under such circumstances, the courts will give much credence to the employee’s right to work and earn a living. The courts recognize the employer’s interest in preventing an employee from taking clients or other assets obtained during the employ; however, more and more the courts are leaning toward the belief that losing one employee is not going to sink the ship. Thus, under the mindset that an employer is better suited than the individual employee to “take the hit,” courts liberally toss out what would otherwise be enforceable agreements.
More and more these days courts are favoring the rights of employees over the employer’s legitimate business interest to be protected. When it comes to the duration of the non-compete, the courts generally focus on what amount of time it will take the employer to hire and train a like employee. Rarely do you find enforceable employee based non-competes which exceed one (1) year in duration. As for the scope, courts focus on the burden placed upon the employee. If the employee has to leave town or take on a different type of employment in order to continue to make a living, the scope will likely be found to be unenforceable.
The enforceability of non-compete agreements is a conundrum for both buyers and sellers and employers and employees. Both sides have legitimate and valuable interests to be protected. Therefore, I always recommend to my clients that prior to drafting or signing any agreement which contains a non-compete clause, consult with an attorney. Doing your homework at the start will help you to protect your interests, whatever they may be, and save you much time and money in the long run.