A non-compete agreement is a contract signed by an employee, guaranteeing that that employee will not work at a nearby business or open one in the future that will be in direct competition with the employer. The legality of a non-compete agreement often depends on the degree to which the employer attempts to curtail the employee's freedom.
A non-compete agreement generally attempts to prevent an employee from opening a business that will compete with his employer or taking his useful skills to a competing business. The focus of non-compete agreements is on certain geographic areas and periods of time; beyond a certain boundary of time or space, the law assumes that direct competition will no longer be a factor.
Contract law imposes certain limitations on the types of relationships that may be established in contracts. For instance, a contract which places one party in servitude to the other is illegal. The law views non-compete agreements that are too broad in scope as possibly establishing such servitude. The Restatement of Contracts, an amalgamation of contract law followed by many state statutes and courts, specifies restraints that restrict competition only to the lowest degree necessary for the protection of the enforcing party. Such contracts must also not cause undue hardship for the restrained party and must not be injurious to the public interest.
Lack of Consideration
Many non-compete agreements fail in court due to lack of consideration. All contracts must have consideration in order to be valid. Consideration is an exchange between the two contracting parties such that each one gives something up in return for the benefit conferred on them by the contract. In non-compete agreements, the law expects the employer to sacrifice something in return for the employee's promise not to compete. Courts will generally find an offer of employment sufficient consideration for a non-compete agreement; one court has even found prior employment sufficient consideration.
Public Policy Constraints
Courts often find non-compete agreements unenforceable on the grounds of public policy because such agreements act as a restraint on trade. Courts will often consider the nature of competing businesses in the area; for instance, if a single veterinarian is serving a huge geographic area with too much demand, a court may decide not to uphold that veterinarian's non-compete agreement with his employee because the area clearly needs more veterinarians. Courts may also analyse the circumstances under which an employee left his employer in deciding whether to enforce a non-compete agreement.
Different U.S. jurisdictions have varying enforcement rules for non-compete agreements. Most states will enforce such agreements, but only if they adhere to the "lowest degree necessary" standard laid out in the Restatement of Contracts. Courts have a great deal of flexibility in interpretation of the scope of such agreements; courts may interpret a non-compete agreement narrowly in order to lessen its effect as a restraint on trade or to serve the public interest. More than half of U.S. states allow courts to apply the "blue pencil rule," in which the court may cross out objectionable terms in the contract to make the agreement enforceable.