Even small businesses must think about building safe and well defined parameters between themselves, hired help and clients. It is tantamount to long term success that a business owner clearly set expectations and define limitations and responsibilities of all the parties involved in business arrangements. It is important that these agreements are customized to fit your particular business needs. These things are accomplished with employment contracts, sales contracts and training agreements which have several clauses, one of these is a non-compete clause. A non-compete clause is an agreement whereby one party agrees not to engage in a similar trade or business, thereby competing with the one in whose favor the contract is drawn. Non-compete agreements may be incorporated into contracts as mentioned previously, or it may be a stand-alone, separate agreement. Non-compete agreements are often coupled with confidentiality agreements – a contract that binds the other party from divulging confidential trade secrets.
While going through the contract before you actually affix your signature, you wonder if this clause is legal even if it is normally included. Clearly, it effectively restrains trade; and without any doubt, you have the right to work and earn a living. Are these clauses legal?
Non-compete agreements have been enforced by the courts since the advent of the Industrial Revolution in the 1800s to prevent unfair competition. The purpose of a non-compete agreement is to protect the interests of the employer or trainer. Surely he doesn’t want the employee or trainee to turn around and use the secrets and tricks of the trade to go up against him in business. It prevents an employee/trainee from taking undue advantage of what would otherwise be confidential information between the parties. The same holds true with a buyer and seller of a business; the buyer will want to make sure that the seller of the business won’t end up competing with him in the future should he regret selling that business and set up another company.
Non-compete laws are set by states, so one state law may vary from another. States such as Alabama, California, Colorado, Delaware, Massachusetts and North Dakota, favor of a strong policy of "competition and employee freedom" and their courts have held that non-compete agreements are invalid – always and without qualification.
Non-compete agreements may be valid in California only under the following exceptions:
1. The owner of a business is selling the entire business, or is selling the goodwill in the business, the seller may be bound by a non-compete clause (Cal. Bus. & Prof. Code § 16601)
2. There is a dissolution or disassociation of a partnership (Cal. Bus. & Prof. Code § 16602)
3. There is a dissolution of a limited liability company (Cal. Bus. & Prof. Code § 16602.5)
In the State of Virginia, it was decided in the case of Paramount Termite Control Co., Inc. v. Rector [380 S.E.2d 922, 924 (Va. 1989)] that a plaintiff must prove by a preponderance of the evidence that the covenant is reasonable in the sense that it is: (1) no greater than necessary to protect its legitimate business interests, such as a trade secret; (2) not unduly harsh or oppressive in restricting the employee's ability to earn a living; and (3) not against public policy.
In states where a non-compete agreements are legal, the contract may be enforced as long as they are reasonable in terms of geographic scope, duration and type of activity prohibited. The word “reasonable” is a subjective term, but courts have interpreted it to mean a balance between protection afforded to an employer/trainer and job opportunities made available to the employee/trainee. The courts will not strike down the agreement or the clause as illegal as long as the geographical and temporal limitations imposed by an employer or trainer are kept to a minimum level. In short, the right to enter non-compete and confidentiality agreements are not absolute because the law recognizes and upholds the right of an individual to make a living.
Courts look into the business' clientele , the employee's job duties, and the location of the business when ruling on the validity of geographical limitations. The employer or trainer may fix a radius within which the non-compete clause shall be in force (example: within a 50-mile radius from the employer's store). Within this radius, an employer or trainer is protected and ensured that the employee or trainee will not get a share of his market base. Take note that it is not lawful for an employer to restrict competition in an area where he is not operating the business for the simple reason that the interest the law seeks to protect is absent.
2. Time Limitations - A non-compete clause cannot be open-ended so as to bar the employee/trainee from competing with an employer/trainer for all eternity. Time limitations are upheld by courts as long as it is not enforced for a period longer than three years. In some states, a non-compete is valid only during the course of employment/training and may not go beyond this period. In other court decisions it was ruled that “the duration should be no longer than the time for which the information has value.” In another decision it was held that it is reasonable if “it represents the time it would take the business to train a replacement for the employee”.
3. Market Limitations, etc. – The employer/trainer may include other factors in the non-compete agreement as long as these factors are legal. These include specifying the market/customer base the employee/trainee should not engage in, and other considerations employer/trainer and employee/trainee may bargain during the negotiation phase of the contract.
Also, the limitation in the non-compete clause/agreement must not make it unreasonably difficult for an employee/trainee to engage in professional activity, otherwise it is not valid. Non-compete agreements or clauses must be negotiated fairly.
Some states require that there be an independent consideration (pre-existing duty rule) for this clause to be valid; that the employee/trainee must receive something from the employer/trainer. Employment is the most common form of independent consideration. Courts of the State of Washington will enforce the agreement if it is validly formed and reasonable as held in Racine v. Bender [141 Wash. 606, 615, 252 P. 115 (1927)] but ruled against its validity in Labriola v. Pollard Group, Inc. [152 Wash.2d 828 (2004)] because it was not supported by independent consideration.
Non-compete clauses are strictly interpreted by the courts and are enforced with caution. The Blue Pencil Rule allows the courts to modify the terms and conditions of a contract if it finds that the provisions are too restrictive to the point of being contrary to law. This is a valid and lawful exercise of judicial authority.
If the non-compete is merely a clause in a contract and is declared to be invalid by the court, say in an employment contract, only that part of the contract is unenforceable but the rest of the contract may still be valid, depending on the legality of the other clauses or if the contract has a separability clause.
Non-compete agreements are valid even in Right-to-Work States such as Alabama, Arizona, Arkansas, Florida, Georgia, Idaho, Iowa, Kansas, Louisiana, Mississippi, Nebraska, Nevada, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wyoming, as long as employees are not required to join a union or pay union dues as a consideration of employment. A non-compete clause may not be enforced in Missouri if the employee was fired from work without just cause.
A former employee or trainee who violates the provisions of a valid non-compete clause or agreement may be liable for damages/monetary compensation. The aggrieved former employer/trainer may petition the court for an injunction – a court order that prohibits the former employee or trainee from engaging in that activity contrary to the agreement.
This blog is not legal advice, but shares information on the law. We are living in hard times; people lose their jobs and many are struggling to make ends meet. Legalbargain.net gives back to society by sharing it’s knowledge and producing advocacy videos to put justice within the reach of those who believe justice is only for those with money.
Comments