By Joan M. Quade
There are many misconceptions about non-compete agreements. Some employers and employees alike believe they are simply unenforceable. Other employees believe they are enforceable and must be signed no matter how broad. Neither position is correct. A non-compete agreement can be enforced against a former employee if there is proper consideration for the entry into the agreement at the appropriate time, and the agreement is reasonable in its nature, length and geographic scope. The agreement can also be enforced under the theory of intentional interference with contractual relations against subsequent employers if they hire an employee bound by such an agreement and one can show that they had actual knowledge of the agreement prior to hiring the employee.
A non-compete agreement can be found in an employment contract or it can be entered into as a separate agreement. A non-compete agreement controls the employee’s action after the employment relationship has been terminated. It is an enforceable promise by the employee to not compete with the employer on specific terms, for a specified period of time, usually within a specific geographical area.
The purpose, from the employer’s perspective, is to prevent unfair competition and to protect an employers’ “good will”. The “good will” of a business is an asset owned by the business. The employer has spent significant resources in developing a relationship with its customers and referral sources and, therefore, it is the property of the company. If the employee leaves the employer after the employee has built relationships with customers, the employee can be a threat to a percentage of the employers’ business. The non-compete stops the employee from taking or even contacting customers for the length of time that the company believes is necessary for the customers to remain loyal to the employer.
Non-compete agreements are disfavored in the law, if they are too broad and excessively restrict the employee’s ability to earn a living, especially in the highly specialized fields. Courts also do not like to limit competition. Open competition is favored because it allows the benefits of competition for the consumer. i.e. choices, and lower prices. However, Courts will enforce a non-compete if it is reasonable and is supported by appropriate consideration.
Length (time). The law says the non-compete cannot be any longer than necessary for the employer to protect their business. To be reasonable, the case law tells us that a non-compete of greater than two years is generally found not to be reasonable. One year is the standard. However, case law provides that two years can be enforced under the right circumstances.
Geographic scope. The geographic scope is what area is covered by the non-compete. Most agreements provide for a 5 to 20 mile radius around the facility or a certain metro area, others are as broad as the State of Minnesota or the five state area. Whether the geographic scope is reasonable depends upon the type and nature of the business, the duties of the ex-employee, and the service area of the employer.
Nature and content. The nature is what is being restrained or stopped. The employer cannot protect more than necessary. If the employee is a research chemist working in the food industry for the employer, it is unreasonable for the non-compete to restrain all chemical research in all industry. Sometimes the non-compete covers a particular field, or the employee is restrained from working for the companies’ competitors or restrained from the type of work that the employee did at the employer’s place of business.
To be enforceable, there must be consideration or some sort of benefit to the employee to sign a non-compete agreement. If there is not, the agreement is unenforceable. If the agreement is presented before the employee is given an offer of employment, the offer of employment is adequate consideration. If the non-compete is presented after the employee started employment, there must be independent consideration (i.e. A bonus or pay raise, etc.) that the employee would not normally be entitled to have.
Additionally, there is some case law that suggests that if the non-compete puts a highly skilled employee out of business for a term, the employer, in order to ensure enforcement of the agreement, should pay the employee’s wages during the non-compete period. That particular case did not say that to be enforceable there must be consideration for the period of restraint after employment, but found that because the employer was paying the salary during this time the agreement was clearly enforceable.
Blue Pencil Doctrine
Reasonable Standard. The employer can only protect legitimate interests and the agreement cannot be broader than necessary to be enforceable. If the agreement is unreasonable in any of its terms, the Court can literally rewrite the agreement through the concept of what is known in the law as the blue pencil doctrine.
The “blue pencil doctrine” is a doctrine of law wherein the Court rewrites the non-compete and then enforces it based upon reasonable restraints.
Example: If the agreement provides that the employee cannot work in the State of Minnesota for three years, the Court would probably find the agreement over broad. However, instead of finding the agreement void, the Court uses the “blue pencil doctrine” to rewrite the agreement to a reasonable scope. For example, to a 10, 20 or 50 mile radius and to a term of one or two years.
This article provides only an overview of non-compete agreements. If you are using a non-compete agreement or are subject to a non-compete, our Business Litigation Department would be happy to review the agreement and procedures in place in interpreting and enforcing non-compete agreements.
Joan M. Quade practices in the Business Litigation section of Barna, Guzy & Steffen. Joan can be reached for questions regarding this article at (763) 783-5138 or firstname.lastname@example.org.