Non-Competition Agreements: Overview

Some employers may require new employees to enter into non-competition agreements before beginning work. Such agreements usually take effect after the employer-employee relationship has ended. Employers may require non-competition agreements for several reasons, including protection of trade secrets or goodwill.

However, courts generally disapprove of non-competition agreements as limitations on a former employee's right to earn a living. When the subject of a legal dispute, non-competition agreements are closely scrutinized in the court system.

This article reviews non-competition agreements. Keep reading to learn more about:

• What is a non-competition agreement?
• What laws affect non-competition agreements?
• Do states enforce non-competition agreements?
• What goes into an enforceable non-competition agreement?
• What methods can employers use to protect confidential information?
• Legal advice about non-competition agreements

What Is a Non-Competition Agreement?

A non-competition agreement is an agreement between an employer and an employee. It's sometimes called a non-compete contract or NCA. It says the employee will not work for competing businesses or open a similar company for a certain period of time or within a specific geographic distance after the worker leaves.

Employers use NCAs to protect sensitive information and trade secrets. In some businesses, NCAs prevent former employees from taking clients if they move to another firm.

What Laws Affect Non-Competition Agreements?

In April 2024, the U.S. Federal Trade Commission (FTC) implemented a new federal law banning most non-compete clauses in employment contracts. This regulation, known as the Final Non-Compete Clause Rule, forbids employers from including, enforcing, or trying to enforce non-compete agreements. This Noncompete Rule provides exceptions in specific, limited situations. Additionally, it nullifies all current non-compete agreements, except for certain high-level executives.

The Noncompete Rule is scheduled to take effect September 4, 2024. Today, non-compete agreements or non-compete clauses in employment contracts are not illegal. But, many courts won't enforce them if they feel the agreement terms are not reasonable, like the amount of time the non-compete lasts or the geographic area it covers.

Many courts view NCAs as "restraint of trade." Some see them as against public policy since they prevent workers from freely moving between employers.

Do States Enforce Non-Competition Agreements?

Some states no longer enforce any non-competition agreements:

• California
• Minnesota
• North Dakota
• Oklahoma,
• Washington, D.C.

Nine other states allow NCAs but restrict their use to employees earning more than a specific salary:

• Colorado
• Illinois
• Maine
• Maryland
• New Hampshire
• Oregon
• Rhode Island
• Virginia
• Washington 

Most states that enforce NCAs have strict limits on duration and scope. Courts are only willing to enforce NCAs if the employer genuinely needs to protect confidential or proprietary information.

What Goes Into an Enforceable Non-Competition Agreement?

In jurisdictions that will enforce an NCA, the courts look at several factors to decide whether it is valid. Courts look to see if the NCA is:

• Protecting a legitimate business interest. The agreement should clearly state what the company is trying to protect. For instance, technology companies are protecting their intellectual property.
• Limited in scope. Prohibitions on geographic areas or other companies must be reasonable. They can't restrict employees' ability to work in a similar industry.
• Limited in duration. Although there is no set time an NCA can last, most courts will not enforce NCAs longer than a year.
• Supported by valid consideration. If the NCA is not part of the employment agreement, the employee must get valid consideration for signing the agreement. The NCA is a contract, and continued employment is not enough consideration to sign the NCA.

Valid consideration means the employee must receive something of value in exchange for the promise to refrain from competition. If an employee signs a non-competition agreement prior to beginning employment, the employment itself will be sufficient consideration for the promise not to compete. But, if an employee signs a non-competition agreement after beginning employment, the mere promise of continued employment will not be considered valid consideration for the promise.

In this case, the employee must receive something else of value in exchange for the promise. Such additional consideration may consist of a promotion or other additional benefit that was not part of the original employment agreement.

What Methods Can Employers Use To Protect Confidential Information?

Besides the use of non-competes, employers have other ways of protecting themselves. These are generally less restrictive than NCAs, and the courts look more favorably on them.

• Non-disclosure agreements. Also called NDAs, these agreements restrict the information, not the person. NDAs help protect proprietary information and trade secrets.
• Non-solicitation agreements. These prevent former employees from trying to contact the company's existing clients. Businesses have a relationship with their clients known as "goodwill." Suppose an employee or independent contractor leaves a company and tries to set up a new business, coaxing customers away from the old firm. In that case, they are interfering with that goodwill. A non-solicitation agreement protects the company's business relationships and client lists.
• Restrictive covenants. These are more often seen in lease agreements. Small business owners may ask a property owner to limit the types of businesses in a mall or shopping center. An employment contract can restrict employees' use of sensitive information after they leave work.

Legal Advice About Non-Competition Agreements

Business owners can protect their proprietary information. The courts usually err on the rights of workers to seek gainful employment. If you want trade secrets and goodwill protection, speak with an employment law attorney.