Non-Competition Agreements: Overview
Some employers may require new employees to enter into non-competition agreements before beginning work, and such agreements usually take effect after the employer-employee relationship has ended. Employers may require non-competition agreements for a variety of reasons, including protection of trade secrets or goodwill. However, courts generally disapprove of non-competition agreements as limitations on a former employee's right to earn a living. Therefore, when made the subject of a legal dispute, non-competition agreements are closely scrutinized in the court system.
Legal Requirements for Non-Competition Agreements
In order to be considered valid, a non-competition agreement must:
- Be supported by consideration at the time it is signed;
- Protect a legitimate business interest of the employer; and
- Be reasonable in scope, geography, and time.
Non-competition agreements must generally be supported by valid consideration -- the employee must receive something of value in exchange for the promise to refrain from competition. If an employee signs a non-competition agreement prior to beginning employment, the employment itself will be sufficient consideration for the promise not to compete. However, if an employee signs a non-competition agreement after beginning employment, the mere promise of continued employment will not be considered valid consideration for the promise. In this case, the employee must receive something else of value in exchange for the promise. Such additional consideration may consist of a promotion or other additional benefit that was not part of the original employment agreement.
Protection of Legitimate Business Interests
The goodwill developed by an employer in terms of customer relations is an asset, so an employer may use a non-competition agreement to prevent a former employee from capitalizing on that goodwill and competing with the original employer. Likewise, an employer may use a non-competition agreement to protect its confidential information. Generally, in order for the information to be entitled to protection, the employer must show that it took reasonable measures to keep the information secret, and that the information gives the employer a competitive advantage.
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