What Is a Non-Compete Agreement? 

You may have come across the phrase “non-compete agreement” or similar terminology like “restrictive covenant”, “covenant not to compete”, or “post-employment restriction”. It’s possible that you’re being asked to sign a non-compete agreement at your new employer, or are leaving an employer with whom you signed a prior restrictive covenant. No matter the situation, it’s important to understand what exactly non-compete agreements are, how they are enforced, and what can happen if they are breached.

A non-compete agreement, or non-compete, is a legal contract between an employer and prospective employee. At its core, a non-compete seeks to prevent an employee from competing with their former employer. This is done by restricting the employee’s activity in that employer’s industry. Non-compete agreements should not be confused with non-disclosure agreements (NDAs), which prevent an employee from revealing confidential information but do not otherwise restrict employment opportunities.

Restrictive covenants exist to protect an employer’s intellectual property and trade secrets. By limiting the activities of a former employee, employers hope to keep that employee from using any information gained on the job to either aid a competing business, or start a competing business themselves. In this way, the employer ensures that their market share is not immediately threatened by a former employee with knowledge of an employer’s trade secrets or other proprietary information.

There are no set standards for non-competes, so restrictions and enforcement are a matter of state jurisdiction. Some states see post-employment restrictions as a legitimate way of protecting the interests of businesses. Other states believe that non-competes are overly restrictive in what should be a free market system. In states such as North Dakota and Oklahoma, non-competes are not recognized at all, and in California an employer can be sued if they attempt to enforce one. Most recently the Federal Trade Commission, under the Biden administration, has proposed a ban on non-compete clauses nationwide, claiming it limits the opportunities of workers and stifles competition.

For the moment, non-compete clauses continue to exist, so it’s in an employee’s best interests to know what kind of restrictions are in the average non-compete agreement. 

What Does a Non-Compete Agreement Consist Of? 

As mentioned, non-compete agreements have no universal standard. The type of activities restricted and the scope of those restrictions is dependent on the business, industry, and the state the employee is in. However, most valid restrictive covenants will include the types of activities being restricted, the duration period for the restricted activities, and the geographic scope in which the activity is restricted. The specifics of post-employment restriction are important, as they are what a court uses to determine if the non-compete is unreasonable or not, if it is challenged by an employee.

When it comes to the specific employment activities being restricted, non-competes primarily prevent an employee from being hired by a company in a similar field. Restrictions can also keep an employee from starting their own business, or developing a competing product. They can also prevent an employee from recruiting other employees to their new company, which is known as a “non-solicitation agreement”.

For the duration of restriction, most non-competes set a period of six months to two years, with a year being the average length. Some employers go as high as three years, but anything beyond that would be considered unreasonable in most courts, outside of special circumstances. 

Geographic scope is typically limited to the area in which the employer directly does business, such as their headquarters or office. It’s not unusual for the geographic scope of a non-compete agreement to extend to the city the employer is in. Post-employment restrictions can also encompass an entire state, and in extreme cases, the nation. However, these are less likely to be accepted by courts, particularly for smaller companies without national business interests.

A non-compete can also identify the specific business or industries that the employer views as competition. It does not need to be an exhaustive list, but enough for an employee to get an idea of the work they’re restricted from.

Breaching a Non-Compete Agreement

As a non-compete agreement is considered a legally binding contract, there can be severe consequences if one is broken. 

Typically, a breach of a non-compete agreement will result in an injunction against the employee in question, in order to prevent any further competitive activity. If successful, the employee will be forced to comply with the terms of the non-compete, which could include leaving their current employer. In a more extreme scenario, the employer will file a lawsuit against the employee, who could face civil penalties as a result. The employer may also choose to seek damages, in the form of profits lost as a result of the breach.

An employee can attempt to challenge a non-compete agreement after breaching it. With the help of a lawyer, the employee might be able to prove that the non-compete is unreasonable in its restrictions or is not protecting any legitimate business interests as defined by state law. Depending on the state, the non-compete will either be modified or voided entirely. Ludwin Law Group has experience in handling cases involving breaches of restrictive covenants. 

Conclusion 

Non-compete agreements can be tricky to navigate. They can differ significantly from employer to employer, and are largely dependent on how the employer’s state recognizes and enforces post-employment restrictions. In states where they are recognized, such as Florida, it is pertinent for employees to be aware of their state’s non-compete statute and what it means for their own employment.

With the Federal Trade Commission’s (FTC) recent proposal to ban non-compete agreements entirely, there may come a time when employees do not need to be concerned about dealing with post-employment restrictions. Until that time, it is important to always seek professional legal counsel, either before signing a restrictive covenant, or when exiting a company with which one has been signed. Otherwise, employees can find themselves with limited work opportunities, and severe legal risks if they attempt to overstep the terms of their non-compete agreement. At Ludwin Law Group we offer legal counsel for non-competes, to help you adequately assess a post-employment restriction you are about to undergo or are already under.