Non-Compete Clauses – Are They Enforceable?

June 17, 2003
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Non-compete contractual clauses, also referred to as restrictive covenants, typically attempt to limit a person’s ability to work within the same field, in a particular geographic area, upon termination of a current employment or business situation. Depending on the state, a non-compete agreement may be enforceable if it is interpreted to be reasonable in time and geographic scope.

What determines “reasonable” depends on an individual set of circumstances, as well as factors such as the length of restriction, the geographic area where the restriction applies and the degree of harm the employer would suffer if the agreement were not enforced.

Consider the following: Carpet Cleaning Professionals Inc. enters into a contract with Joe Cleaner. Joe shows a lot of potential and, within two years, he forms Joe’s Cleaning. Joe takes out ads in the Yellow Pages alongside those of Carpet Cleaning Professionals Inc. He eventually begins informing Carpet Cleaning Professionals Inc.’s clients that he can provide them with the same, if not better, service for less money.

When Carpet Cleaning Professionals Inc. learns of these events, their legal counsel sends Joe a not-so-friendly reminder note referring to their signed contract. The note informs Joe that, should he not cease and desist immediately, they will see him in court very soon.

What does Joe do? First, he pulls out his contract to ascertain what it specifically requires or prohibits, and how the clause itself is phrased. In this particular case, Joe has agreed that, for a 2-year period, he will not work for a similar company within a 100-mile radius of Carpet Cleaning Professionals Inc.’s primary place of business. Since Joe has already invested in purchasing advertising space, sustained printing costs and leased an office location, he definitely needs to consider consulting a qualified business or employment attorney.

The general rule in many states is that restrictive covenants are enforceable if they are fact specific, being reasonable in both time (e.g. 1 year vs. forever) and geographic scope (e.g. cities a, b and c vs. the entire state) and where consideration forms the basis of the contract (“consideration” is a legal term giving rise to an enforceable promise, essentially requiring the parties to engage in an agreed-upon conduct, as distinguished from a mere “gratuitous promise.”).

In addition, Joe’s status with Carpet Cleaning Professionals Inc. needs to be examined. Was he a bona fide employee, or was his status that of an independent contractor? Many employers classify paid staff as “independent contractors” in order to avoid paying medical benefits, pension plans, workers’ compensation insurance, etc. If Joe turns out to be an independent contractor, he may be in a better position to successfully challenge the non-compete agreement, assuming he lives in a state where such agreements are enforceable.

Carpet Cleaning Professionals Inc. may still enforce protecting their client list by pursuing an unfair trade/competition theory of liability against Joe’s Cleaning, as they are probably in a good position to prove a certain degree of harm in that Joe had access to, and communicated with, Carpet Cleaning Professionals Inc.’s clients and clearly attempted to interfere with existing business relationships.

In all cases, know what you are agreeing to as you enter into a contract. Should your contract contain a non-compete clause, be sure to consider and evaluate the potential impact such an agreement may have down the road.

The information published here is based on general legal principals only, and should not be construed as legal advice, nor as forming an attorney-client relationship. For local statutes and regulations always consult with a local attorney.

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