A non-compete agreement is a legal document between an employer and employee that helps protect company and trade secrets for a certain period of time while an employee works at a particular institution, and often for a specified period of time after the employee has left the company. Sometimes, outside contractors will sign non-compete agreements during their temporary contract with a company that might have sensitive trade information that cannot be disclosed – government contractors, tech corporations, and research institutions may all have employees or temporary contractors sign non-compete agreements.
Non-compete agreements are also used between businesses when they terminate a business relationship. This protects both businesses from having trade secrets revealed immediately to competitors.
If you are an employer and you need to create a legitimate non-compete agreement, you must take these three items into consideration to ensure that your form is legally valid:
- The form must be supported by consideration at the time it is signed by both employer and employee;
- The non-compete agreement may protect a legitimate business interest of the employer, but not be broad in scope; and
- Be reasonable regarding employee and former employee expectations in terms of geography and time limitations.
Reasonable Expectations for Non-Compete Agreements Defined
If you need to create a non-compete agreement for potential and former employees or business partners to sign, keep these considerations in mind:
- Length of time: if the agreement extends for a short period of time after an employee leaves the company, or for the duration of employment only, then courts are much more likely to find a non-compete clause or form legitimate. Generally, non-compete agreements last for two years or less; any longer, and a judge is more likely to rule in favor of a former employee, especially if finding new employment is hampered.
- Geographic area: if the non-compete agreement tries to cover too large a geographic area, then it will be considered unreasonable. However, the size of this area can be defined differently based on the industry. Technology companies have become notorious for abusing this clause, so be careful when writing this specific piece of the agreement.
- Defining competition: rather than define the industry as a whole, employers should create a short list of direct competitors, or define “competition” as former employees using trade secrets to create a business that is directly in competition with their former employer within a certain period of time (usually 2 years or less).
Legal Issues with Non-Compete Agreements
In too many cases, non-compete agreements have been abused by employers to force employees to stay within a specific company by limiting their ability to find employment at other, similar institutions. State and federal courts disapprove of this use of non-compete agreements, and frequently strike down those that are too broad in scope or time.
Although non-compete agreements are generally legal under federal law, each state has different regulations for these legal forms. In North Dakota and Oklahoma, non-compete agreements are not enforceable at all. The state of California does not allow non-compete agreements except for very limited circumstances, so these will rarely hold up in courts of law. However, employers in California, and other states, might instead consider using a nondisclosure agreement to protect specific aspects of their business.