Can You Count on Noncompetes?

Increasingly, employers are requiring new-hires, especially those in top positions, to sign noncompete agreements to safeguard trade secrets and prevent them from stealing clients after departing the company. But this protection is hardly ironclad: An employer may still have to go to court to protect its interests.

According to a new report cited in The Wall Street Journal, the number of published U.S. court decisions involving noncompetes jumped by more than 60% in a 10-year span beginning in 2002, including a total of 760 cases in 2012. Because most of these types of lawsuits are settled out of court and those opinions are not reported, the number of cases is likely much higher.

Background: An employer may require a noncompete to be signed as a condition of employment or upon “separation from service” (e.g., the employee is quitting, being fired or retiring). For instance, signing the agreement may entitle a departing employee to receive a severance package. The noncompete will generally limit employment activities in the same field for a designated period of time.

However, the agreement cannot be overly restrictive and must be carefully worded. In other words, you cannot bar an ex-employee from pursuing his or her livelihood. Typically, an individual may be allowed to join a competing firm, but will be prohibited from contacting former clients or customers. The language in the agreement should be approved by an experienced attorney.

The enforceability of a noncompete, or a clause in a more substantive employment contract, generally depends on whether the restrictions are “reasonable” or not. When assessing the reasonableness of a noncompete agreement, the courts will weigh the following factors:

*the length of time the agreement remains in force

*the scope of the geographic area restricting the employee

*the reason for the employee’s departure

*if the agreement restricts activities not in competition with the company

*if the agreement prevents the employee from working in his or her chosen field

A court’s decision on violation of a noncompete usually turns on the extent of the employee’s knowledge and his or her actions. For example, an employee may claim that he or she has no knowledge of trade secrets or other confidential information, but only “general knowledge” of the business. In that case, the burden of proof is on the company to establish that the knowledge includes trade secrets or is otherwise confidential.

If a court finds that the employee has only general knowledge, or the agreement is simply designed to hinder the competition, no legitimate business interest is being protected. As a result, the noncompete is not likely to be enforceable.