Non-Compete law is complicated and fraught with uncertainty. Employers sometimes exploit this uncertainty to exact compliance. For departing employees and the companies that hire them, the good news is that non-competes are often harder to enforce than it may first appear.
Non-compete agreements are different from other agreements. They are subject to closer judicial scrutiny than most other types of contract. To be sure, some states are tougher on non-competes than others. But even in the most pro-non-compete jurisdictions, a court will refuse to enforce a non-compete if certain exacting criteria are not met. Why is that?
A guiding principle of American law is freedom of contract—the freedom of two parties to form a binding agreement, on whatever terms the parties deem appropriate, without government interference. If you contract with me to sell me something for a certain price, and then I back out of the deal, a court will not inquire into whether the price or other terms are, in its judgment, fair or reasonable. Assuming the contract is otherwise valid, a court will in most instances simply enforce it as written.
But certain contracts will not be enforced as written. To take an obvious example, courts will not enforce a contract to perform an illegal act. Such contracts are said to be “void as against public policy.” Perhaps less obvious, but relevant here, a contract that would impose an unreasonable “restraint of trade” is also void as against public policy. This is because American law favors free and open competition. Restraints of trade include restrictions on a person’s freedom to conduct his or her business and make a living—i.e. non-compete agreements. Limited restraints may be permitted, but if a restraint is unreasonable, a court will not enforce it, even if the parties agreed to it.
The big question then becomes: What is reasonable? In most other types of contract litigation, courts never have occasion to examine reasonableness. Other contract issues—scope, performance, and so on—will be the focus. But with non-compete agreements, reasonableness is front and center in practically every dispute. A handful of states—most notably, California—ban most non-compete agreements altogether. Everywhere else, there is a complex and constantly evolving body of law for determining whether a non-compete is reasonable and enforceable. Courts will undertake a fact-intensive inquiry that examines the contract’s geographical and temporal scope and the business interests it purports to protect, as well as other issues including the consideration supporting the non-compete.
Non-compete law is an ever-shifting terrain—and one fraught with uncertainty. Not infrequently, employers exploit this uncertainty to induce compliance with questionable non-compete agreements. The good news for departing employees (and the companies hiring them) is that even in pro-non-compete jurisdictions, non-competes are often harder to enforce than it may first appear. For an employee who knows his or her rights, a good outcome is often very much achievable.
Law and the Creative Economy comments on non-competes, trade secrets, intellectual property, and other areas of law. The blog is only for informational purposes. Lawyer Maxwell Goss maintains this blog. Click here to contact Max.