EMPLOYEE NON­COMPETITION AGREEMENTS WHEN ARE THEY ENFORCEABLE?

Few things are more vexatious to a business owner than
the employee who, just when he has been fully trained and is
finally contributing meaningfully to his employer’s bottom line,
quits and either goes to another employer or sets up his own
shop. In addition to thinking that the employee is underhanded
and ungrateful, the employer wants to prevent the employee
from using his knowledge of the employer’s business, systems,
customers, etc. for someone else’s benefit. Meanwhile, the
employee, in addition to thinking that he has been underpaid
and underappreciated, wants to continue building his resume
and career with the experience he has gained.

Both employer and employee may be under
misapprehensions as to what they can respectively prohibit or
do. On the one hand, an employer may think that having signed
the employee to a “non­compete,” he has safeguarded himself
from competition from the employee. The employee, on the
other hand, may think that, not having signed a “non­compete,”
he is free to poach the former employer’s customers, replicate
his practices and use whatever the employee has in his own
head. Both would be wrong.

In ruling on the enforceability of post­employment
restrictive covenant agreements, courts consider the interests of
three parties: the employer, the employee and the public. The
employer has a legitimate interest in protecting its trade secrets,
confidential business information and client relationships. The
employee has a legitimate interest in earning a living in his
chosen field. The public has an interest in free and fair
competition. The concept of the public interest may be
expanding to include the public purse. In 2013 a proposal was
introduced in the New Jersey legislature to invalidate non-
compete agreements if the restrained employee would become
eligible for unemployment benefits. How to reconcile these
competing interests?

The employer’s legitimate interest is in limiting the use of
his trade secrets and other proprietary information and so
protecting himself from unfair competition. Much as he might
want to avoid any competition, fair or unfair, from a former
employee, he generally doesn’t have that right. Given that
restraints on trade are generally prohibited rather than
encouraged, a court considing the enforceability of a non-
compete agreement will scrutinize it carefully and interpret it

Courts will not enforce restraints which cause “undue
hardship” to the employee. This means that restrictive
covenants must be reasonable in time and scope. Depending
on the industry, courts generally consider one to two years a
reasonable time frame. Black letter law provides that restraints
must also be limited geographically, but in the internet world this
is not a meaningful aspect of many covenants. However, in the
case of restaurants, retail operations, personal and professional
services and other local “in person” fields, a reasonable
geographic limit is still required.

Courts will also consider whether the employee was let
go or resigned of his own volition, arguably bringing any
hardship on himself.

Both employers and employee want to know if the non-
compete agreements they’ve faced with are enforceable. The
answer is usually “maybe.”

DISCLAIMER ­ This article is for general information only
and is not intended to provide legal advice or to address specific
legal problems. This article does not create an attorney­client
relationship. For legal advice concerning employee
agreements and all other legal matters, consult an attorney.