Non-compete clauses are often part of an employment agreement and prevent an ex-employee from competing with his former employer, generally by working for a competitor. Non-compete clauses are considered "restrictive covenants" because they restrict what the ex-employee can do, and as with many restrictive covenants, courts are often reluctant to enforce them if they are not "reasonable." In determining whether a non-compete clause is "reasonable," courts generally consider three aspects of the clause: (1) geographic scope, (2) duration and (3) type of activity subject to restriction.
The purpose of a non-compete clause is to preserve the business interests of the former employer with whom the employee has signed the agreement, states the "Illinois Business Law Journal." Businesses use them to "prevent employees from engaging in competition or appropriating confidential information for their own use or use by competitors." Non-compete clauses may be part of a larger agreement, like an employment contract, or they may be entirely separate agreements, referred to as non-compete agreements.
According to the "Illinois Business Law Journal," "non-compete agreements have been around since the 1400's. . . . However, as the 'free transferability of property and goodwill became an important social goal,' non-compete agreements were disfavoured by courts." Because the enforceability of non-compete agreements was seen as "a barrier to craftsmanship and open trade," courts did not routinely enforce them "until the start of the Industrial Revolution" in the 18th century.
According to BusinessDictionary.com, a non-compete clause is a provision in a business agreement that restricts the employee from starting or working in a similar business for a certain number of years (typically three) in a specified geographical area. It is also known as a noncompete clause, non-compete agreement, no competition clause or agreement, or covenant not to compete.
The "Rule of Reasonableness" is applied by the courts and dictates that a non-compete clause must be reasonable in order to be enforceable. This rule provides that the non-compete clause must be reasonable in terms of geographic scope, duration and type of activity prohibited.
The geographical area covered by the clause must be reasonable under the circumstances; e.g., a 50-mile radius from the employer's store might be considered reasonable. The circumstances considered include the services provided by the employee and the importance of the services to the employer's business. Generally, according to FindLaw, "courts will not allow a non-competition agreement to prevent an employee from working in a geographical area where the employer does not do business."
The duration of the clause must also be reasonable. According to FindLaw, "the reasonableness of the duration of the agreement will depend on the specific facts of each case. For instance, if the non-competition agreement is designed to protect confidential information, the duration should be no longer than the time for which the information has value."
A non-compete clause must not unnecessarily prohibit an ex-employee's business activities. To the contrary, according to the International Law Office, it may only protect the employer's business and trade secrets and protect the employer's customer or supplier base. Also, the clause must not render the employee's subsequent professional activity unreasonably difficult. For example, it is unreasonable for an employer who engages in the sale of automobiles to prohibit its former employees from selling life insurance.
If a non-compete clause is overbroad, a court may refuse to enforce the agreement entirely or it may instead narrow the clause and enforce it as modified. The remedy for violation of a valid non-compete clause is either damages (i.e., payment of money) or an injunction prohibiting the former employee from engaging in activity that violates that clause.
Non-compete clauses are subject to state law, and state laws may differ. For example, courts in several states, including Alabama, California, Colorado, Delaware, Massachusetts and North Dakota, have held that non-compete agreements are always invalid, oftentimes, according to the "Illinois Business Law Journal," in favour of a strong policy of "competition and employee freedom."
While non-compete clauses may be a valid way for businesses to protect themselves, courts also recognise that they limit a former employee's ability to earn a living and therefore enforce them with caution.