There are many misconceptions about non-compete agreements. This is not too surprising, considering that whether they are even legally enforceable is a very fact-specific analysis.
While there are no bright-line rules to help business owners determine whether a non-compete agreement will be enforceable in court, working with an experienced attorney can help provide maximum protection without being vulnerable to a challenge in court.
Common Pitfalls with Non-Compete Agreements
- Failing to identify what is actually being protected. Business owners often fail to evaluate the business interest they are trying to protect when asking their employees to sign a non-compete agreement. Non-compete agreements are often implemented simply because it is a good business practice from a human resources perspective. However, a deeper dive into the desired protections of these agreements is critical to ensure their effectiveness and enforceability.
- Using a non-compete agreement when a different type of agreement is more appropriate. Business owners may assume they need to use a non-compete agreement when in reality, they need a non-solicitation agreement (restricting someone from taking customers, employees, etc.) or a confidentiality agreement (restricting someone from using trade secrets or other information).
- Failing to revisit the company’s needs regularly. Business owners should remember that just because a non-compete agreement may have fit the company’s needs and business activities years ago, it does not mean such an agreement is still a good fit for the business today.
Issues to Consider when Requiring Employees or Contractors to Sign a Non-Compete Agreement
If you want to add another layer of protection to your business by implementing a non-compete agreement, there are a few questions you should ask as you get started:
- Is the obligation to sign the non-compete coupled with some type of valid consideration?
- Could the employee or contractor make a valid claim that you negotiated the non-compete in bad faith?
- Does your company have a legitimate business interest that the non-compete attempts to protect?
- Is the duration and geographic limitation of the non-compete agreement reasonable to protect the company’s legitimate business interests?
- Could the terms or conditions of the non-compete be viewed as being against public policy?
Options to Enforce a Non-Compete Agreement
The enforceability of a non-compete agreement varies from state to state. This can be particularly challenging for larger companies with employees or contractors nationwide.
However, even California law, which generally invalidates non-compete agreements, recognizes the need to protect a company’s trade secrets and other confidential information.
Typical enforcement options include a lawsuit for damages and injunctive relief from the court to immediately stop severe damages from violating the non-compete agreement (often referred to as a temporary restraining order).
Non-Legal Issues to Consider
When determining whether non-compete agreements will be in the company’s best interest, business owners should consider how enforcing a non-compete agreement may affect company morale. Suing an employee who has quit or been fired might send the wrong message to current employees. An experienced attorney can help navigate whether doing so is worth pursuing.