Understanding non-compete agreements

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Understanding non-compete agreements

There are a number of industries where businesses require at least some of their employees to sign non-competition or “non-compete” agreements before they begin working for them. These typically restrict the worker from going to work for a competitor for a certain period and/or within a specific geographic area after they leave the company. 

Some businesses require people to sign an agreement only when they take a new position in the company (whether as a new or current employee or contractor) where they’re privy to ideas in development, special calculations, formulas, trade secrets or any kind of proprietary information. 

In the highly competitive toy industry, for example, companies don’t want someone taking the ideas they’re working on to another company and beating them to market with a new line of dolls or robots. However, any business where being the first out with a new product has cause to worry about what their employees will share with a competitor if they’re lured away to a better job.

Not all non-competition agreements will hold up in court

Drafting a non-competition agreement that satisfies the legal requirements requires knowledge of the law. For an agreement to be valid, it needs to:

  • Protect a legitimate business interest
  • Be reasonable in time, geography and scope
  • Be supported by valid consideration

The last of these basically means that an employee must get something of value for agreeing to restrictions that will impact their career after they leave the company. Just being hired or being allowed to continue working may not be regarded as valid consideration. However, if an employee has to sign a non-competition agreement in order to get a promotion and raise, that may well be legally acceptable.

Whether you need to develop a non-competition agreement, defend one that has already been signed or take action against a former employee who has breached their agreement, it’s wise to have legal guidance as you proceed.

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