Contact the experienced employment law attorneys at Maya Murphy, P.C. today at (203) 221-3100 or JMaya@Mayalaw.com

Whether you’re hiring an employee, entering into a business relationship with a third party, or buying a business, you’re undoubtedly considering using a non-compete agreement to protect your future interests. A non-compete agreement is a powerful tool that keeps those who have come into contact with either your clientele or your company’s proprietary information from using that information to turn-around and become a close-range competitor in your market.

The issue with non-compete agreements is that many businesses draft overly restrictive agreements that would never hold up if challenged in court. These companies try to enforce statewide restrictions for 10+ years, or longer. So how do you know if you have drafted a non-compete agreement that is legally enforceable?

States usually look at four different factors to determine if your non-compete agreement is valid. They ask: 1) Is it limited in time?; 2) Is it limited in geographic scope?; 3) Is it limited to a particular industry or activity?; and 4) Does it protect a legitimate business interest?

Because non-compete agreements put limits on commerce and a person’s/company’s ability to work, courts assess these four factors very closely. Therefore these agreements need to be narrowly tailored to meet the needs of the enforcing party. There are no hard-set limits as to what you can and can’t do, rather, courts look at a totality of the circumstances to assess the validity of a non-compete agreement.

1) Is It Limited in Time?

Courts will ask, how long is this restricted covenant’s time duration and is it reasonable given the circumstances. Many self-drafted non-compete agreements attempt to place time lengths that are unreasonable. For instance, if you are operating a tailor shop and your agreement states that the applicable person can’t operate a competing business (within a reasonable distance as discussed below) for 1 year, it will be more likely to hold up rather than stating that the same person can’t operate a competing business for 3+ years. The reason is that within that industry, people use a tailor that does good work and are usually hard-pressed to leave that tailor once found. It is reasonable to expect that a person looking for a new tailor will find one that he/she is comfortable with within a year. Prohibiting the restricted person for more than 2 years is overly lengthy given the nature of the industry.

When you are looking at digital businesses (i.e. marketing, design, and other geographical limitless digital services) courts are less likely to enforce lengthy times and more likely to enforce covenants not to solicit clients of the other party.

2) Is It Limited in Geographic Scope

This question asks whether the geographic distance of the restriction is reasonable. In the example of a tailor, a court would almost definitely hold invalid a non-compete agreement that had a statewide restriction. However, since it is reasonable to believe that a person wouldn’t drive more than 10 miles out of his/her way to find a tailor, a restriction that a person can’t operate a competing business within 10 miles of the other company would be a lot more likely to be held as valid.

Again, in businesses that aren’t limited by geographic scope, courts are likely to enforce restrictions on physical business locations and restrictions on soliciting the clients of the other party. While they are willing to enforce restrictions on clients in the local vicinity, this usually provides somewhat minimal protections for digital businesses.

3) Is It Limited to a Particular Activity or Industry?

The main consideration here is the effect the non-compete agreement has on the restricted person’s/company’s livelihood. If a person is a tailor and has been a tailor his/her whole life, a non-compete that generally restricts that person’s ability to perform tailor services will likely be held invalid, whereas if that same agreement just limited the restriction to tailoring suits, for instance, when the person is a dress tailor, the court will likely find that to be limited in scope enough to be valid because it doesn’t overly restrict the tailor.

Likewise within the tech industry, and other technical jobs that require specific skills, courts will likely hold blanket restrictions to be invalid. For graphic designers and web developers, agreements that state that a person cannot engage in any graphic design or web developing activities is overly broad. However, restricting that person from working in certain areas of web development or graphic design (i.e. certain coding languages or targeting graphic design clients in certain industries) is more likely to be held valid.

4) Does it Protect a Legitimate Business Interest?

This analysis is different in every state. Illinois used to hold that a legitimate business interest existed if 1) the employer’s relationships with its customers were near-permanent, and the employee would not have had contact with those customers but for his or her employment with the employer; and/or 2) the employee had acquired confidential information from the employer and attempted to use such information for his or her benefit.

However, that test has been replaced with a “totality of circumstances” test that is extremely vague and takes the particular facts of each occurrence to assess whether a legitimate business interest exists. One thing can be certain, if the interest involves proprietary or confidential customer/business information, it will be more likely to be held as a legitimate business interest. However, if you are trying to restrict someone from having contact with your clientele or using certain practices but that information is not protected and is made readily available to the general public, the court will likely find that restriction to be invalid.

In general, non-compete clauses must be narrowly tailored to meet the needs of the enforcing party and must not be overly restrictive as to cause undue hardship on the opposite party. It is important that you draft a non-compete clause that will hold up in court; otherwise you have wasted paper and potentially birthed another close-range competitor in your market.

If you are concerned with noncompetes and would like to explore your employment law options, contact the experienced employment law attorneys today at 203-221-3100, or by email at JMaya@mayalaw.com. We have the experience and knowledge you need at this critical juncture. We serve clients in both New York and Connecticut including New Canaan, Bridgeport, White Plains, and Darien.

Source https://www.linkedin.com/pulse/20140929151034-19959056-4-reasons-why-your-non-compete-agreement-probably-isn-t-valid