Understanding Non-Compete Agreements
Non-compete clauses or non-compete agreements — also known as “convenants not to compete” — are found in many employment contracts.
What is a non-compete agreement? In essence, it’s an agreement that an employee will not compete with her employer for a certain period of time in a particular geographical area. Typically, when an employee quits or is discharged, the non-compete agreement prohibits the employee from working for another competing company or starting a new, competing business within a certain distance for a limited period of time.
But not all non-compete agreements are enforceable.
A non-compete agreement cannot — I repeat: cannot — be used for the sole purpose of reducing competition. The New Jersey courts have been very clear about this. In fact, the courts are advocates of the free market. The courts are reluctant to enforce non-compete agreement except when it is necessary and protects legitimate business interests. A company or employer who enforces a non-compete agreement for the sole purpose of reducing competition is not likely going to win.
The courts are not in the business of limiting trade. The courts do not want to prevent people from working the job that they love to do unless the employer has legitimate business reasons and the non-compete agreement is narrowly tailored to that end.
What might be a legitimate reason for enforcing a non-compete agreement? Perhaps the ex-employee had access to trade secrets or confidential business information. Or perhaps the ex-employee had access to “proprietary information” that no one else outside the company knew about. Those could potentially be legitimate reasons.
In some cases, it can be very difficult to prove that a former employee had access to company “trade secrets.” This is especially true for small businesses — there are rarely “trade secrets” to speak of in small businesses, and therefore, little to no reason for small business owners to enforce a non-compete agreement.
Unfortunately, employers abuse non-compete agreements by casting a wide net. Many companies try to use the non-compete agreements to eliminate competition outright. That’s why many non-compete agreements are drafted as broadly as possible.
As a general rule, non-compete agreements must be limited in time, geography, and scope.
Consider these four examples of unreasonable terms of non-compete agreements:
- A hair salon cannot enforce a non-compete agreement that says that former hair stylists must work at least 100 miles away. This is clearly not reasonable. Likewise, an employee who quits her job at a car dealership in Bergen county most likely cannot be prevented from working as a car salesman at a car dealership in Warren county.
- Former employees cannot be prohibited from working as a car salesman in a particular county for 10 years. Any such non-compete agreement would be unenforceable because 10 years is not reasonable.
- Non-compete agreements that prohibit former employees from working as a scientist anywhere in the world is unenforceable. It is not reasonable.
- Non-compete agreements that prohibits a martial arts instructor from working as an instructor within 100 miles for life is not reasonable.
Non-compete agreements are litigated by both large and small businesses.
For most small businesses, the time and money that could be spent on litigation are better spent on running the business, advertising, paying employees, and paying taxes. A select few small business owners do not feel that way, however, and will spend tens of thousands of dollars to litigate to enforce a non-compete agreement if necessary.
Unless the small business definitely has trade secrets or proprietary information that could potentially be worth millions of dollars, it is almost always a terrible idea for a small business owner to litigate a former employee’s breach of the non-compete agreement.
It is very important that employers and employees understand the limits of non-compete agreements. Often times, neither employers or employees appreciate how broadly their non-compete agreements are until they talk to a lawyer.
Employers who are interested in enforcing a non-compete agreement to protect their legitimate business interests are encouraged to consult with an attorney to evaluate the language of the non-compete agreement in the company’s employment contract.
Employees who are threatened with an enforcement action should reach out to an attorney who can evaluate the language of the non-compete agreement objectively and put up a good defense against any request for an injunction or order to comply with the terms of the non-compete agreement.