A non-competition agreement raises state-law public policy concerns. As a result, states often restrict the scope of non-competition agreements before they will enforce them. The protectable interests that states will recognize, the rules of construction that states will apply and the required elements of a non-competition agreement will vary from state to state. You may adhere to general guidelines in drafting non-competition agreements, but you should always consult local law.
Most jurisdictions disfavor non-competition agreements as a matter of public policy because they view such agreements as a restraint of trade. Broader language places a heavier burden on the employer to justify the restrictions whereas narrowly tailoring the language of a non-competition agreement reduces the risk that a court will construe the agreement to unnecessarily restrain trade.
Many jurisdictions use a balancing test that weighs the employer’s justification for the restriction or the employer’s protectable interest against the employee’s interests or ability to earn a living. Generally, courts will enforce non-competition agreements where the employer substantiates a protectable interest on the facts presented and the employee agreed to language that was narrowly drafted to protect the employer’s interest. Drafters of non-competition agreements should consider:
- Whether the protectable interest is something that would give the employee an unfair competitive advantage
- Whether the potential unfair competition would cause irreparable harm to the employer
- Whether a less restrictive option exists to protect the employer’s interest
In order to draft a non-competition agreement that a court is likely to enforce in the event an employee does not uphold the employee’s end of the bargain, employers should follow these best practices:
In Ohio, for example, non-competition agreements which are reasonable are enforceable and those which are unreasonable are enforced to the extent necessary to protect an employer’s legitimate interests. The seminal Ohio case is Raimonde v. Van Vlerah, decided by the Ohio Supreme Court in 1975. The Ohio Supreme Court held that “[a] covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee, and is not injurious to the public.” The Ohio Supreme Court also made it clear that “[c]ourts are empowered to modify or amend employment agreements to achieve” a reasonable covenant between the parties.
- Identify an employer’s legitimate protectable interests
- Identify the particular type of employee at issue
- Identify the level of restriction necessary based on the type of employee at issue
- Identify choice of law and venue
To be enforceable, restrictive covenants must be “reasonable.” The reasonableness test in most states focuses on three factors—the scope of activity prohibited, the duration of the covenant and its geographic scope. These factors are measured against the employer’s purported legitimate interest in enforcing the restrictive covenant. A restrictive covenant must not be more restrictive than necessary to protect the purported legitimate interest or rationale for imposing the restrictive covenant or it will amount to an illegal restraint of trade.
Examples of these factors include the following:
Some states have statutory time ranges for a restrictive covenant while other states restrict the restrictive covenant for a period of time for which the interest to be protected is reasonably expected to be worthy of protection or for so long as the information remains a trade secret or confidential.
The larger the geographic area in which an employee is prohibited from working, the more likely the agreement is unreasonable. Some states will balance the restraints and protected hardships on the employee with the legitimate interests of the employer.
Most courts will enforce a geographic restriction to an area in which the employee worked or for which the employee was responsible. Accordingly, non-competition agreements will often refer to such an area as a territory.
Most courts enforce restrictive covenants that limit the geographic restriction to an area in which the employee worked or for which the employee was responsible. Often the contracts will define the area in which the employee worked as a territory. As business has expanded onto the internet and customers are sought far beyond the physical presence of the company, courts have viewed broader geographic restrictions as reasonable.
A restrictive covenant can express geographic limitations in territory terms or mileage boundaries. If mileage boundaries are used, identify a specific rationale for the particular distance chosen.
Drafting non-competition agreements require forethought and analysis of applicable state law to ensure enforceability. One size does not fit all when drafting non-competition agreements and drafters need to ensure that the interests of the employer and the employee are balanced and that reasonable restrictions are set forth in the agreements.