One increasingly common portion of employment agreements is a non-compete agreement, designed to keep an employee from leaving one business and immediately competing with their prior employer. There has been some debate in the courts about the extent to which these non-compete clauses are enforceable and there are some good rules of thumb for businesses looking to use non-compete agreements.
Non-compete agreements are generally unenforceable in the state of California. To be valid, a non-compete agreement must be given in exchange for some form of consideration, meaning that the employee receives something of value, such as a job, some company stock, or a bonus in return for signing the agreement. It must also protect a legitimate business interest, such as preventing a former employee from taking existing customers and starting a competing business next door. Someone who works for a business has inside information into how leads are generated, how they’re converted to customers, who is currently a customer, and what a business’s pricing structure is if a non-compete agreement is not in place. With valuable information, often the trade secrets of a business, an employee could unfairly compete with the existing business.
Finally, the non-compete agreement must be reasonable in scope, time, and geography. This is perhaps the area where there is the biggest debate. The courts will look to see if the non-compete agreement sets reasonable boundaries on the scope of work that is considered competitive, the length of time the non-compete applies, and the geographic restrictions. These boundaries should be based on the business’s current, reasonable business interests. Courts will not let an employer use a non-compete agreement to completely prevent an employee from being able to find work in their skill area.
Overly Broad Non-Compete Agreements
In cases where courts have reviewed non-compete agreements, rather than throwing them out completely, they often limit the scope down to something that protects the business’s legitimate concerns while still allowing the employee to find work. The scope of the non-compete agreement may be restricted or the duration may be modified. However, if the non-compete agreement is so broad that its intent was clearly to prevent any future competition, then the court may refuse to enforce the agreement. Businesses should keep these requirements in mind when crafting non-compete agreements to ensure they’re protecting their concerns without leaving themselves open to potential interpretation by the courts.
Employers looking to protect their businesses with non-compete agreements as part of their employment package should reach out to experienced business counsel for assistance to ensure the agreement’s restrictions are reasonable. The attorneys at Chase Law Group, P.C. know that every client is unique and will take the time to understand your business and make recommendations that are right for you. Schedule a consultation today by calling (310) 545-7700.