Non-Compete Agreements: Bluff, or Big Stick?

Legal Compliance Resource
July 9, 2013 — 845 views  

Typical non-compete agreements forbid employees from working in companies that are competitors of the company where they have been working after they leave the company. The agreements specify a time frame and geographical distance of the competing companies where the leaving employees may not work. There could be other possible limitations as well.

Restrictive Covenant

The purpose of restrictive covenant is to safeguard trade secrets and intellectual property. However, from the perspective of the employee, a job consistent with the limitations imposed can be difficult to find. In some cases, the laid off workers could be precluded without compensation. In addition, it may be noted that restrictive covenant differs from state to state.

Take the case of Virginia. The non-compete agreements that are not narrowly designed to meet specific requirements of the employers may not be enforceable. If employers persist with enforcement of non-valid agreements they could be subjected to tort liability and sanctions. The same goes for Massachusetts and several other states where this is a heavily litigated area.

In other words, the courts can enforce this agreement only when the contract is narrow enough to consider employers’ legitimate interests. In addition, the contract must not be unduly tough to employees seeking livelihood and must comply with the public policy. 

Draft of the Agreement

In view of the liabilities arising against the employers whose draft of non-compete agreement is poor, it is important to draft the agreement appropriately to escape future liabilities and having to pay compensations. The three guiding principles in framing the drafts should take care that they are narrowly drafted; they must not be too burdensome against employees seeking the next employment; and they must comply with the public policy rather than go against the same. 

An important non-compete case concerns Omniplex World Services Corp.Vs. United States Investigations Services. The Virginia Supreme Court ruled in favor of the employee holding that there was no evidence of direct competition with the employer. In another case, Motion Control Systems. Inc. v. East, the Supreme Court found “greater restraint than necessary” as the ground for the invalidation of the agreement.

In other words, non-compete must be reasonably drafted to take care of geographical scope, time duration and function.

Other Aspects to Consider

Some of the other aspects that must be taken into account while drafting non-compete is that they must not be too burdensome on the employees seeking next employment. For instance, some businesses have unlimited geographical scope such as cigar import. The employers should not prohibit the employees from seeking employment in competing business in such cases. Another example is that of a plumber who is restricted from working in households in a set of states as it will impact their ability to earn livelihood.

The non-compete cannot be enforced if it is against the public policy. It should avoid restraints against anticompetitive trade. If an employee is trained in a sole occupation, they cannot be made to abandon that occupation, nor should they be forced to locate elsewhere. There are instances where, the court invalidated a restrictive covenant upon an employee who was restrained from being employed in a geographical location.

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