Many companies use non-compete agreements to prevent selected employees from using trade secrets, customer relationships, and commercially sensitive information to the competitive disadvantage of the employer after the employment relationship ends. These non-compete agreements, sometimes drafted by experienced counsel but often a mark-up of a “template” found on the Internet or from a precedent in the company’s files, range from well drafted to clearly unenforceable. There are some general rules that apply to these agreements, but the operative word is “general”. Court cases and governing statutes vary from state to state—over a wide spectrum of results—so the “general rules” are really just an a group of common themes that have several important exceptions.
One general rule applied by courts is that a non-compete agreement must balance the rights of the individual to pursue employment or business opportunities matching his or her experience and qualifications against the rights of the employer to protect propriety information and customer relationships that have been developed at the employer’s expense. No one would quarrel with the need for such a balance but the “balance” of competing interests is quite often a subjective determination. The balancing is normally expressed as the need for reasonable limits on the term of the non-compete provisions and geographical area to which they apply. In addition, the restrictions on the individual’s post-employment activities should bear a reasonable relationship to his or her responsibilities at the former employer. For example, a sales person who sells specialized computer software to banks might be prevented from selling competing software to the same banks post-employment, but that does not mean the courts would uphold a restriction so broadly drafted that it prevented the former employee from selling media services to those same banks.
Another general rule is that there should be some consideration given by the employee for his or her agreement to be bound by non-compete provisions. Again, the exceptions are just as important as the rule. Some states, such as New York and Connecticut, consider continuing employment to be adequate consideration for a non-compete agreement. Other states require that some benefit be given to the employee in exchange for the employee’s agreement. This benefit might be the commencement of employment, a bonus, an award under a stock or option plan, or access to confidential information. A third group of states requires that actual value be given by the employer and the courts in those states may scrutinize the exchange to see if what the employee received is something he or she would have received even in the absence of the non-compete agreement.
Added to all of this—sometimes superseding it—are statutory requirements imposed by more than twenty states, which range from pro-individual to pro-employer. Here is a summary (note that these statutes are paraphrased; different restrictions often apply in the sale of a business or an ownership interest, the dissolution of a partnership, and restrictions on the practice of physicians or individuals working in the broadcasting industry):
|Alabama||Ala. Code § 8-1-1||One who is employed as an employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city, or part thereof so long as the employer carries on a like business therein|
|California||Cal. Bus. & Prof. Code §§ 16600 – 02||Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.|
|Colorado||Colo. Rev. Stat. § 8-2-113||Any covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer shall be void, but this shall not apply to any contract for the protection of trade secrets.|
|Delaware||Del. Code Ann. Title 6 § 2707||Applies only to non-compete agreements that to attempt to restrict physicians|
|Florida||Fla. Stat. § 542.335||In the case of a restrictive covenant sought to be enforced against a former employee, agent, or independent contractor, a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than 2 years in duration.A court shall construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement. A court shall not employ any rule of contract construction that requires the court to construe a restrictive covenant narrowly, against the restraint, or against the drafter of the contract.|
|Georgia||Ga. Code Ann. § 13-8-50||“reasonable restrictive covenants contained in employment and commercial contracts serve the legitimate purpose of protecting legitimate business interests and creating an environment that is favorable to attracting commercial enterprises to Georgia and keeping existing businesses within the state.”|
|Hawaii||Hawaii Rev. Stat. §§ 480-4(c), 607-14.9||It shall be lawful for a person to enter into a covenant or agreement by an employee or agent not to use the trade secrets of the employer or principal in competition with the employee’s or agent’s employer or principal, during the term of the agency or thereafter, or after the termination of employment, within such time as may be reasonably necessary for the protection of the employer or principal, without imposing undue hardship on the employee or agent.In a civil action which involves the interpretation or enforcement of an agreement or alleged agreement which purportedly restricts an employee from competing with an employer, or former employer, or working for a competitor of an employer or former employer, any employee or former employee who prevails shall be awarded reasonable attorneys’ fees and costs.|
|Illinois||820 ILCS 17/1, 5, 10 and 15||Applies only to broadcasting industry employees|
|Louisiana||La. Rev. Stat. Ann. § 23:921||Any person, including a corporation and the individual shareholders of such corporation, who is employed as an agent, servant, or employee may agree with his employer to refrain from carrying on or engaging in a business similar to that of the employer and/or from soliciting customers of the employer within a specified parish or parishes, municipality or municipalities, or parts thereof, so long as the employer carries on a like business therein, not to exceed a period of two years from termination of employment. An independent contractor, whose work is performed pursuant to a written contract, may enter into an agreement to refrain from carrying on or engaging in a business similar to the business of the person with whom the independent contractor has contracted, on the same basis as if the independent contractor were an employee, for a period not to exceed two years from the date of the last work performed under the written contract.|
|Maine||Me. Rev. Stat. Title 26 § 599||Applies only to broadcasting industry employees.|
|Massachusetts||Mass. Gen. Laws Ch. 112 § 12x, Ch. 149 § 186||First applies only to physicians. Second applies only to broadcasting industry employees.|
|Michigan||Mich. Comp. Law § 445.774a||An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business. To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.|
|Missouri||Mo. Rev. Stat. § 431.202||A reasonable covenant in writing shall be enforceable if: (i) between an employer and one or more employees seeking on the part of the employer to protect: (a) confidential or trade secret business information; or (b) customer or supplier relationships, goodwill or loyalty, which shall be deemed to be among the protectable interests of the employer; or (ii) between an employer and one or more employees, notwithstanding the absence of the protectable interests described in clause (i), so long as such covenant does not continue for more than one year following the employee’s employment; provided, however, that this subdivision shall not apply to covenants signed by employees who provide only secretarial or clerical services.|
|Montana||Mont. Code Ann. §§ 28-2-703 to 705||Any contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void, except in connection with the sale of a business or the dissolution of a partnership.|
|Nevada||Nev. Rev. Stat. § 613.200||Any person within this state who willfully does anything intended to prevent any person who for any cause left or was discharged from his or its employ from obtaining employment elsewhere in this state is guilty of a gross misdemeanor and shall be punished by a fine of not more than $5,000, except this shall not apply toan agreement with an employee of the person, association, company or corporation which, upon termination of the employment, prohibits the employee from: (a) pursuing a similar vocation in competition with or becoming employed by a competitor of the person, association, company or corporation; or (b) disclosing any trade secrets, business methods, lists of customers, secret formulas or processes or confidential information learned or obtained during the course of his employment with the person, association, company or corporation, if, in the case of (a) or (b), the agreement is supported by valuable consideration and is otherwise reasonable in its scope and duration.|
|North Carolina||N.C. Gen. Stat. § 75-4||No contract or agreement limiting the rights of any person to do business anywhere in the State of North Carolina shall be enforceable unless such agreement is in writing duly signed by the party who agrees not to enter into any such business within such territory, provided, nothing herein shall be construed to legalize any contract or agreement not to enter into business in the State of North Carolina, which contract is made illegal by any other section of this Chapter. [Note: Covenants not to compete in NC will be enforced if they are, “(1) in writing, (2) part of the contract of employment or sale of the business, (3) based on valuable consideration, (4) reasonably necessary for the protection of the employer’s interest, and (5) reasonable as to time and territory.” ChemiMetals Processing, Inc. v. McEneny, 476 S.E.2d 374, 376 (N.C. Ct. App. 1996).]|
|North Dakota||N.D. Cent. Code § 9-08-06||Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void, except in connection with the sale of a business or the dissolution of a partnership.|
|Oklahoma||Okla. Stat. Title 15 § 217-219a||Every contract by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void, except (i) in connection with the sale of a business or dissolution of a partnership and (ii) a person who makes an agreement with an employer, whether in writing or verbally, not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer. Any provision in a contract between an employer and an employee in conflict with the provisions of this section shall be void and unenforceable.|
|Oregon||Or. Rev. Stat. § 653.295||A noncompetition agreement entered into between an employer and employee is voidable and may not be enforced by a court of this state unless: (i) the employee is engaged in administrative, executive or professional work who (a) performs predominantly intellectual, managerial or creative tasks, (b) exercises discretion and independent judgment; and (iii) earns a salary and is paid on a salary basis; or (ii) if the employee is not described in clause (i), the employer informs the employee in a written employment offer received by the employee at least two weeks before the first day of the employee’s employment that a noncompetition agreement is required as a condition of employment; or the noncompetition agreement is entered into upon a subsequent bona fide advancement of the employee by the employer. In addition, the employer must have a protectable interest, i.e., the employee has access to trade secrets, or to competitively sensitive confidential business or professional information that otherwise would not qualify as a trade secret, including product development plans, product launch plans, marketing strategy or sales plans. The term of a noncompetition agreement may not exceed two years from the date of the employee’s termination. The remainder of a term of a noncompetition agreement in excess of two years is voidable and may not be enforced by a court of this state. None of foregoing language applies to Bonus Restriction Agreements or covenants not to transact business with customers of the employer. “Bonus restriction agreement” means an agreement, written or oral, express or implied, between an employer and employee under which (i) competition by the employee with the employer is limited or restrained after termination of employment, but the restraint is limited to a period of time, a geographic area and specified activities, all of which are reasonable, (ii) the services performed by the employee pursuant to the agreement include substantial involvement in management of the employer’s business, personal contact with customers, knowledge of customer requirements related to the employer’s business or knowledge of trade secrets or other proprietary information of the employer; and (ii) the penalty imposed on the employee for competition against the employer is limited to forfeiture of profit sharing or other bonus compensation that has not yet been paid to the employee.|
|South Dakota||S.D. Cod. Laws § 53-9-8 to 11||Any contract restraining exercise of a lawful profession, trade, or business is void to that extent, except (i) in connection with the sale or a business or dissolution of a partnership, and (ii) an employee may agree with an employer at the time of employment or at any time during his employment not to engage directly or indirectly in the same business or profession as that of his employer for any period not exceeding two years from the date of termination of the agreement and not to solicit existing customers of the employer within a specified county, first or second class municipality, or other specified area for any period not exceeding two years from the date of termination of the agreement, if the employer continues to carry on a like business therein.|
|Texas||Tex. Bus. & Com. Code Ann. § 15.50-52||A covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.|
|Wisconsin||Wis. Stat. § 103.465||A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint. [Note: Wisconsin courts frequently invalidate non-compete agreements that are overly broad in any respect.]|
Finally, there is the “blue-pencil” doctrine and the doctrine of “equitable reformation”. In states where one of these doctrines applies, the courts may modify a non-complete agreement if it imposes unreasonable restrictions on the former employee. Under the blue-pencil doctrine, a court can “blue pencil”, or cross out, the words that create the unreasonable restriction, provided that the agreement is otherwise reasonable without the excised portion. Under the doctrine of equitable reformation, the court will rewrite the restriction so that it meets the requirements of reasonableness, even if this rewriting involves more than striking certain words from the agreement.
In states that do not apply the blue-pencil or equitable reformation doctrines, some states hold that a non-compete agreement that goes too far is simply not enforceable. Other states have not decided the issue.
States that allow blue-lining or equitable reformation, either through statute or case law, are Alabama, Arizona, Connecticut, District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Oklahoma, Oregon, South Carolina, South Dakota, Texas and Vermont (unless, in the case of Vermont, the covenant as a whole evidences an intention to place an unreasonable and oppressive restraint on the employee, in which case the entire covenant will be invalidated).
“No modification” states are Arkansas, Louisiana, Nebraska, Oklahoma, Virginia, and Wisconsin
Of the remaining 18 states, six have statutes that make non-compete agreements void or subject to very narrow restrictions (California, Colorado, Hawaii, Montana, North Dakota and Oklahoma). The other 12 states are probably best described as open to argument in terms of modifying overly broad non-compete agreements. To be sure, non-compete agreements often contain their own “severability” clause with words such as, “If any provision or portion of this Agreement is for any reason held to be invalid, illegal, or unenforceable in any respect, the invalidity, illegality, or unenforceability shall not affect any other provision, and this Agreement shall be equitably construed as if it did not contain the invalid, illegal, or unenforceable provision.” These clauses may have some influence in states that have not already adopted a position on modification of unreasonable non-compete agreements, but more likely courts in those states will view the severability clause as “boot-strapping” by the employer and they will analyze the issue as a question of whether public policy should favor the business interests of the employer or the employment opportunities of the individual.
Bottom line: Non-compete agreements are often drafted without much care, but they are frequently one of the first documents an employer looks for when a key employee announces that he or she is leaving.