ARE NON-COMPETE AGREEMENTS ENFORCEABLE?

Wednesday, November 18, 2015

Are Covenants Not To Compete Enforceable?

The short answer is that a Non-Compete Agreement will be enforced if it is necessary to protect a legitimate business interest and it is reasonable as to: 1. Time 2. Geography or distance, and 3. Scope except in such states as California that do not allow these agreements.

Typically, two to three years is reasonable for an employee and five years is reasonable for a seller of a business. The distance that is reasonable is largely dictated by whether you are in an urban market or a rural market. A ten or twenty mile agreement may be reasonable in rural Vermont or New Hampshire whereas a three or five mile agreement might be unreasonable in downtown Boston. The scope of the agreement is typically reasonable if it only restricts those elements that are needed to protect legitimate business interests. For example it would be unreasonable to restrict a seller of a Veterinary Practice from opening up a pet store or an animal shelter.

Each of the 50 states in this country has its own common law, recent case rulings and statutes and therefore, this article states only general principles, and those principles may differ slightly in your jurisdiction. If you are asked to sign a Non-Compete Agreement or if you would like an employee sign a Non-Compete Agreement, please consult a local attorney.

The Courts have been more willing to enforce Non-Compete Agreements when you are the seller of a business than when you are an employee. The reason for this distinction appears to be that part of the purchase price of the business included the Non-Compete Agreement and for equitable reasons the seller should not be allowed to take back what he has been compensated for and sold. Conversely, the Courts are reluctant to enforce Non-Compete Agreements that are an undue burden on an employee or where there has been a high degree of unequal bargaining power.

Who determines if a Non-Compete Agreement is enforceable? Because these agreements are enforceable in equity and not in law, the decision as to enforcement is made by a trial judge and not a jury. While a competent attorney should be able to render an accurate opinion as to the enforceability of an agreement, trial judges do not always know the law and they do make mistakes. If a trial judge makes a ruling that is “clearly erroneous” you might be able to get the decision overturned on appeal, but appeals can be very costly.

CONCLUSION

Non-Compete Agreements are serious legal documents. Please consult an attorney before signing one or if you think you might be violating an agreement. If you are an employer, resist the temptation of downloading boilerplate forms and have a local attorney draft your agreement.

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