Non-Compete Agreements

In today’s hyper competitive business environment, clients often ask whether they should require employees to sign non-compete agreements.    The short answer is “It depends”.   Whether a non-compete agreement is indicated depends on the nature of the business, the level of the employee’s knowledge, expertise and compensation, as well as the extent of the employer’s investment in developing the employee’s skill and expertise.

Non-competes are most often required of highly compensated employees engaged in professional services (doctors, accountants, attorneys, engineers, scientists); senior executives, and high-level sales persons.  Their use is driven by an employer’s desire to prevent the deployment of knowledge and expertise developed at the employer’s expense in the service of a competitor, and, to a lesser extent, to protect information important to the employer’s business.

Supported by US Law

In general, US law supports the right of individuals to apply their skill and knowledge wherever and whenever they choose, assuming they do so lawfully.  Some limitations and restrictions will be permitted, so long as they are “reasonable” considering all of the facts and circumstances.

It is reasonable to prevent an employee in whom a company has invested considerable time and resources, and where that employee was highly compensated and his or her expertise is specific and high level, from going to work for a direct competitor.  Other factors in determining reasonableness are the duration of the restriction and its geographic or industry-specific scope.  A non-compete cannot be so restrictive as to prevent an individual from ever again working in his or her chosen field.

For example, while it may be reasonable to prevent a national marketing director in the pharmaceutical industry from working for a direct competitor for a period of two years, it is probably not reasonable to apply the same restrictions to a low-level sales rep in the same industry.

Non-Compete Agreements Effectivity

The effectiveness of a non-compete will depend to a large extent on its perceived enforceability, and a well-drafted non-compete will be perceived as reasonable, and therefore enforceable.  For an employee, the employer’s willingness to enforce a non-compete is largely unknowable, and, because of that uncertainty, a well-drafted non-compete can be a powerful deterrent.