Non-Competition Agreements
Note: This post was from January 2023, and the law on this subject is currently changing.
Employers trust their employees with sensitive information, like how they make their products, how to find customers, and strategies for future growth. They also trust employees with sensitive relationships with suppliers and customers. But employment relationships are not forever, and so employers often ask their employees to sign confidentiality agreements before trusting them. Since these agreements may be difficult to enforce, they may also have employees sign non-competition or “non-compete” agreements as well.
Why should you read this post about non-competition agreements?
You signed one but you really want to work for a competitor.
You fell asleep at a dance competition and you think maybe the opposite of a competition (a non-competition) will be more interesting.
Because you are contractually prohibited from reading other blog posts about them, like this one or that one.
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How They Work
Many contractual provisions work by entitling a plaintiff to go to court and seek money damages from a defendant. And employers could do the same with a non-competition agreement, seeking damages from an employee who breaches the agreement. But more often, an employer does not want money from the employee, but a court order that prohibits her from working for a competitor. For this reason, many non-competition agreements have clauses that expressly state that money damages would be insufficient to address a breach.
So when an employer learns that an employee is about to work for a competitor, it may seek a temporary restraining order from a judge, barring the employee from the new job. In addition to filing a lawsuit, alleging a breach of the agreement, it files a memorandum of law and a supporting affidavit that explains that the employee has valuable information or relationships that she obtained from the plaintiff and that, if she is allowed to work for the new employer, will damage the plaintiff by allowing the new employer to benefit from that information or those relationships.
After that, the employee or the new employer may have to submit an opposition to the motion. But this could be expensive and requires the new employer to spend time and energy preparing the opposition. For this reason alone, many employers do not want to hire people who are subject to a non-competition clause. And many require employees to promise in their employment agreements or offer letters that they are not subject to such an agreement.
Many employment agreements require employees and employers to submit their disputes to arbitration. But because arbitrators cannot quickly issue orders that can prevent employees from working for competitors, many contain an exemption for injunctions to enforce non-competition clauses so that employers can go to court for them.
Limits on Non-Competition Agremeents
Courts are often reluctant to enforce non-competition agreements. They recognize that workers need to be allowed to make a living and often do not have the same bargaining power as employers when entering into employment agreements. And so they will not just enforce any non-competition agreement they see. Instead, they only enforce ones with reasonable limits.
When deciding whether to enforce a non-competition agreement, courts examine whether they are necessary to protect the employer’s sensitive information and relationships. If the non-competition requirement lasts longer than a year or two, or applies to companies that are not in the same geographic or product market as the plaintiff, a court may consider it excessive. And if the employer fired the defendant without cause instead of the defendant quitting on her own, a court may not enforce the agreement.
But if a noncompete agreement is over broad, a court may not throw it out altogether. Instead, it may (but not always) “blue pencil” the agreement, reducing its scope to an acceptable level. Some courts, however, refuse to do this since it creates a new agreement to which the parties did not agree.
Even with these limits, many people still do not want to enforce non-competition agreements. North Dakota and Oklahoma prohibit them. And recently, the federal government has considered bringing an end to the enforcement of non-competition agreements and many people argue it should. But for now, employers routinely seek them from employees, even if enforcement of them may be uncertain.
Non-Solicitation Agreements
In addition to non-competition agreements, employers frequently seek promises from employees not to solicit other employees or customers to do business with a third party. While this may seem like a non-competition agreement since it seeks to prevent a competitor from benefiting from the assets the employer conferred on the employee, it is technically different. Instead of preventing the employee from working for a competitor, it bars their efforts to persuade other people from switching allegiances from the employer to someone else.