Employment contracts often contain clauses barring the employee from competing with the employer for a certain period of time after the employment is terminated. An employer who feels that a former employee has violated such a clause can sue under the contract. Courts, however, often are not enthusiastic about enforcing these “noncompete” agreements (also called “covenants not to compete”), because they are anticompetitive and contrary to the basic principles of a free-market economy. Such agreements also limit employees’ ability to earn livings and to support their families. Courts, however, are willing to afford employers some protection from unreasonable competition by former employees.
Most courts examine noncompete agreements on a case-by-case basis. The agreement generally must be part of an enforceable contract, supported by consideration. Continued employment may be sufficient consideration. The covenant must be reasonably necessary to protect the employer’s business, and not unreasonably restrictive of the employee’s rights or harmful to the public interest.
Courts generally consider the time and place restrictions in the noncompete clause and try to weigh the competing interests of employer, employee and public. There are few hard and fast rules for the validity of these restrictions, but ordinarily, time and place limits must be reasonable. For example, if a manufacturer of mobile homes required employees to agree not to compete for 10 years in all 10 states in which the employer markets its products, it is likely that a court would find the restriction too burdensome on the employees, as well as on buyers of mobile homes, to be enforceable. If, however, it were limited to two years and only the state in which the company is located, it might well be enforceable. In some instances, a noncompete covering the entire country might be enforceable if the industry is one in which only a few companies compete nationally.
Questions about the enforceability of a noncompete agreement should be discussed with an attorney in your state. State laws and court rulings on noncompete clauses vary widely; employees never should rely solely on the general information available at Prairielaw, but should consult local counsel before making any decisions.
“Consideration” is the thing of value promised, or detriment incurred, by each party to a contract. If one party offers no consideration, there is no contract, but only an unenforceable promise by the other party. An employee incurs a detriment, and thus offers consideration, when he or she agrees to a noncompete clause. If there is no corresponding benefit for the employee, the clause is not enforceable, because the employer offered no consideration. Generally, however, courts consider continued employment to be sufficient consideration to enforce an otherwise valid noncompete agreement.