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As a business owner, you know how important – and sometimes difficult – it is to ensure you remain a step ahead of your competition. Often, remaining competitive and successful means you need to stop former employees from jumping ship to your competitors until you have a chance to replace them. That’s where a non-compete agreement can help.
When an employee signs a non-compete agreement, he or she agrees not to work for a competitor or to start their own competitive business for a certain period of time after he or she leaves your company. Many non-competes also have geographic components that prevent employees from working in a certain area. Most non-compete agreements are part of larger contracts like employment agreements, but they can be stand-alone documents.
The enforceability of non-compete agreements can vary by state. For instance, non-compete agreements are basically illegal in California. That means that if one of your employees leaves your business and begins working for a business in California, your non-compete will probably not be enforceable there. In Arizona, non-competes are handled differently: Although Arizona is a “Right to Work” state, the courts have determined that non-compete agreements are enforceable if they are reasonable and serve a legitimate business purpose.
When crafting a non-compete agreement, you need to consider several factors to ensure the agreement is reasonable and therefore more likely to be enforced:
First, is the type of competition being prevented reasonable?
Let’s say you own a distribution company that specializes in pacemakers by a certain manufacturer. It may sound reasonable to you to ban your top salesperson from working for any medical device manufacturing or distribution company. However, a non-compete preventing that salesperson from selling other pacemakers would be more likely to be enforced by a court. Another way to look at it is to ask how it would hurt your business to have your salesperson peddling knee replacement joints? If you cannot answer that one very clearly, expect a judge to strike down your non-compete. Also, employees are more likely to break unreasonable agreements, so if your terms are too stringent, you may be creating more headaches for yourself. Another guideline is to never ask an employee to sign a non-compete that you would not sign yourself.
Second, is the time period reasonable?
If you want your non-compete enforced, it must have a time limit. Some states have limits on the length of time a non-compete is allowed to remain in effect. For instance, in New Jersey a non-compete cannot exceed two years. I advise business owners to make the non-compete as short as possible to recruit, hire and train a replacement employee. Using the pacemaker distributor example above, you would want to figure out how long it would take to get a new salesperson in place and then have them be in the field to build relationships with the surgeons, insurers and hospitals who will be making the decision of which pacemaker to use in their patients.
Third, is the geographic area too large?
You can’t include an unrealistically large area in your non-compete without running the risk of having the agreement struck down. After all, your employee will have to earn a living, and including an unrealistically large geographic area in this restriction can be seen as being unfair. Generally speaking, your non-compete should cover only the area in which you do regular business. If you sell pacemakers only in Texas, you should not have your non-compete cover the entire U.S.
If you’re not sure whether to use a non-compete, consider this: courts and legislatures around the country seem to be looking at non-competes in a less favorable light all the time. Including a heavy-handed non-compete clause in an employment agreement might even cause the entire agreement to be thrown out by a court. Instead, you might want to consider using a non-solicitation provision that focuses on an employee’s future solicitation of your current customers and employees. (More on that topic in a future post.) For best results, work closely with an attorney to discuss your concerns and the issues you want to have covered by your agreement to make sure it’s as strong as possible, while also being most likely to be enforced when you need it the most.