Non-Compete Agreements: What Can They Accomplish?

It may seem ironic that companies encourage innovation and brilliance while employees are on the payroll, but pull the plug on that ambition if they dare to leave. But non-compete agreements attempt to do just that to control damage.


Whether signed when staff members come on board, or as part of a ream of paper presented as they leave, non-compete agreements have similar restrictions. An employer lays claim to any products, intellectual property and ideas developed while on the job. And customers or clients handled while a staff member was employed by the company are also generally off-limits.

Courts have tried to balance the interests of employers and departing employees in deciding whether or not a non-compete agreement should be upheld. In order to hold up, here are three areas in which the agreement must be reasonable:

Restrictions must normally be limited to the job the employee performed for the employer. For example, a software engineer for one automaker can't be restricted from taking a sales job at another manufacturer's showroom.

Non-compete agreements are subject to the laws of the state in which they're written. Some states don't recognize them. Others stipulate that employees must enter into the agreements when first hired. If the document is sprung on an employee later -- up to and including quitting day -- the company may have to offer something extra (such as a promotion, raise, stock options or other enticement) for the agreement to be valid.

So the best time to secure an agreement is generally when you hire an employee.

To sum up, you can prevent staff members from competing with you after they leave your company but the exact restrictions depend on many things -- most importantly, whether circumstances make it reasonable and enforceable.

Consult with your attorney for assistance in drafting the agreement or if you feel a former employee's conduct violates a non-compete agreement.

State Laws Vary

Laws regarding non-compete covenants vary from state to state. For example, courts in California reject non-compete agreements because state law makes them unenforceable except in limited circumstances. Because non-compete covenants are generally not allowed in California, employers there often use confidentiality agreements and other types of contracts to protect trade secrets and other information.

Courts Rulings

A few examples illustrate how courts have looked at agreements:

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