A lot of employers are using non-compete agreements in a blanket manner for all of their employees. Some national companies have been thrashed in the media for doing so. Many state legislatures are moving legislation to limit the use of non-compete agreements. Oregon and Washington were the latest states to do so. Nevada also changed its laws on non-compete agreements in the past couple years. I take special interest in these three states because those are the states in which I am licensed to practice law but this article is meant to give a broader overview rather than being state-specific on information.

In a lot of cases employers are simply using standard form agreements that they found through a simple Google search. The employer may think these agreements have to be enforceable because after all the employee signed the document. Employees may think any number of things. A large number may not remember signing a noncompete agreement. Of those that do recall signing a non-compete agreement, some may assume its enforceable because they signed it, but others may ignore the non-compete and seek employment with a competitor of their former employer or go into business for themselves against the former employer.

When there is a signed non-compete agreement, employees may wonder before taking their new position if their former employer could sue them under the agreement. The former employer may learn later of an employee’s employment for a competitor and consider filing a lawsuit to prevent the former employee’s continued employment with the competitor. The new employer may be concerned over its legal liability for hiring an employee potentially subject to a valid non-compete agreement. The heart of the matter then is whether the non-compete agreement is enforceable.

It is important to note that each case involving employment litigation (and that is what litigation over a non-compete agreement is) is based on the intricate details and facts of the case. So, there is great variation among fact patterns and state laws that will control whether or not non-compete agreements are enforceable.

Without further adieu, here are three reasons that a non-compete agreement may be unenforceable:

1. The Agreement is not Narrowly Tailored Enough

Most state statutes on non-compete agreements will hold an agreement enforceable and most courts will enforce these agreements if they are: (1) reasonable in geographic and temporal scope; (2) protect the legitimate business interests of the employer, (3) do not impose extreme or undue burdens on the employee in earning a living, and (4) do not place a burden on the interests of the public. The more narrowly tailored the agreement is, the more likely a court will enforce the agreement if called upon to do so.

On the other hand, if the agreement is unreasonably broad, a Court may have trouble enforcing it. As an example, limiting an employee from ever performing work in the same industry for as long as they live will not be enforced. Similarly, lets say the company only operates in a single city, it would be unreasonable for the non-compete agreement to prevent the employee from working in the whole United States. If the employer has no legitimate interest in preventing the employee from competing and it is merely trying to trap the employee in employment with them that should not be considered a legitimate business interest.

Even if the non-compete agreement is not narrowly tailored enough to comply with state laws concerning reasonableness, the courts may blue pencil the agreement, which reforms the document to reach the result the court believes both parties intended. This does take control out of both employer and employee hands, which can be undesirable for a number of reasons. Nevada statute specifically permits courts to blue pencil overly broad non-compete agreements. In Washington, courts had used the blue pencil rule as a matter of common law to reform non-compete agreements. It is unclear under the new Washington law if that will still be permitted. Oregon common law also permits a court to blue pencil an agreement. Whether blue penciling can be done and the extent to which a court can reform an agreement with the blue pencil rule is very different across the states.

2. Insufficient Consideration was Offered for the Agreement

It is a basic principle of contract law that in order for there to be a contract, there must be consideration. That is to say each party to an agreement must provide something of value to the other party for there to be a non-compete agreement or any other type of agreement. What is sufficient consideration will vary greatly among states.

In Nevada, simply the promise of continued employment for an at will employee is enough for a court to find there was consideration to form the non-compete agreement. This really is the bare minimum standard for consideration. This bare minimum is not acceptable in all states. As but one example, promise of continued employment is insufficient in Oregon for a court to find there is a valid and enforceable non-compete agreement.

Many law school contract casebooks detail cases where a contract was not enforced because of lack of consideration. It is an elementary principle of contract law but one that many parties may not realize is missing in their agreements.

3. The Agreement is not a Separate Document

Whether it is trough laziness or lack of knowledge and experience, a fair number of employers will place non-compete language or clauses in their employee handbooks. An employee handbook is not the proper place for a non-compete clause or agreement. Placing non-compete language in an employee handbook will raise a host of enforcement issues. This is not to say that non-compete agreements must always be a separate document, but there are states that do make this a requirement.

We all know the form employee handbooks that many employers large and small have. They have an acknowledgement form at the back of the handbook that requires an employee to sign to acknowledge their receipt of the handbook and its terms. Some employers may think this signed acknowledgment form is sufficient to create a non-compete agreement. Not so fast!

Employers also like to make sure their handbooks have various disclaimers. These disclaimers are usually to protect the employer from litigation. However, in this context, it is those disclaimers that could cause litigation. Employee handbooks usually have two main disclaimers (most of the time in bold font or type) that state the handbooks are not contracts and the employee’s employment is always at will. The disclaimer stating the handbook is not a contract could mean the non-compete clause within the handbook is unenforceable against an employee. If the handbook is not a contract, how could the non-compete clause within it be enforceable?

Final Word of Caution

Non-compete agreements have been around for a long time and courts in several states have taken varying views of their terms and enforceability. In recent years, many states have begun to curtail their use. It is very important to examine your state’s specific laws concerning non-compete agreements to determine whether or not the agreement may be enforceable.

Disclaimer:

This article merely provides legal information and it is not legal advice. The article does not form and is not intended to form an attorney-client relationship between the author and any reader of the article. The only way for a person to obtain legal advice on their specific situation is by retaining an attorney licensed to practice in the appropriate state.