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Non-Compete Agreements – Enforceability Issues

August 6, 2013 | Posted In Business Litigation

A non-compete or severance agreement can be used to protect business interests when executives, sales personnel technical or scientific specialists, or managers leave a company to join a competitor or start their own business. While case law in the area of non-compete and severance contracts is always in flux, and varies widely from state-to-state (add a choice of law provision in the Agreement) , employee contracts are generally enforceable so long as they do not impose unreasonable geographic restrictions or inordinately restrictive time frames, given the overall factual context. While companies are entitled to protect trade secrets and proprietary information, their departing employee has a right to earn a living., and the Court must balance these interest. While a restrictive covenant against a skilled neurosurgeon or a scientist with knowledge of the employer’s research plans might well be enforced for 3 years and 75 miles, 6 months and 25 miles might be viewed to be excessive for a commercial plumbing company’s salesperson. Serious restriction are normally limited to those who play as essential role in the company.

Typically, an “essential role” refers to job functions and responsibilities that are directly related to a company’s proprietary information, competitive advantage, intellectual property or client management. Consequently, employers who ask account managers, proposal writers, customer service representatives or other lower-level employees to sign non-competes may find they have no legal grounds for enforcing them when challenged in court.

Non-Compete Agreements for Current Employees

In general, no extra consideration is needed if a Company requires an employee to sign a new Employment Agreement with a restrictive covenant. The black letter rule is that continued employment is consideration enough. But these covenants will be enforced only the reviewing Court finds them to be “reasonable” and “equitable” under all of the circumstances, so it might not hurt to throw in a signing bonus if particularly stringent restrictions are obtained.

Non-Compete Agreements and Non Disclosure Agreement

Non-Disclosure Agreements typically accompany restrictive covenants. Not only can’t the departing employee compete for a period of time, but he or she can’t use or sell the company private proprietary information, such as customer lists, or trade secrets, such as unpatented manufacturing techniques not generally known to the public. Some of these restrictions are for a period of time only; some are permanent.

Enforceability and Non-Competes

While each case is different, in general a non-compete agreement that imposes a time frame in excess of three years will likely be deemed unenforceable. The “reasonableness” of the time frame involved must consider whether or not a non-compete imposes an undue burden by preventing a former employee from earning a livelihood in his or her line of work. Here, a review of case law may help determine how a court may find when extenuating factors are present. Even so, before employers ask employees to sign non-competes, they should be confident that the agreement is enforceable. In New Jersey, the Court has the right to “blue pencil” excessive restrictions, reducing the geographic scope from the entire State to a 50 miles radiues, for example. But if the restrictions are so overly restrictive and the terms of the agreement overly punitive, the Court may feel that the employer overreached and decline to blue pencil but instead decide to refuse to enforce any part of the restrictive covenant whatsoever. If there are questions as to its enforceability, an experienced employment law attorney should be consulted.

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