Corporate Law Blog

What factors bear upon the enforceability of non-compete agreements?

For businesses, non-compete agreements can be an important way to protect their interests in work product, resources and other knowledge to which employees become privy in the course of their employment. Non-compete agreements, though, are only effective when they are properly drafted, and it is important for businesses to have a strong grasp of the requirements for a valid agreement and to make sure they implement processes to ensure the validity of any agreements they negotiate with employees or prospective employees.

The basic requirement with any non-compete agreement is that it must be reasonable and not overly burdensome on the employee. What exactly this means depends on various factors. Several of these factors have to do with the parties to the agreement and the relationship between them. These are: the nature of the employer's industry; the relevant characteristics of the employer within that industry; and the history of the employer's relationship with the employee.

In considering the reasonableness of a non-compete agreement via these factors, courts will consider, among other things, how important non-competes are to the employer's industry, the geographical scope of the agreement, when the agreement was entered into and how much training the employee received from the employer.

Reasonableness being a fluid factor, there are few hard and fast rules regarding when an agreement is enforceable with respect to these factors and when it is not. For this reason, businesses making use of these agreements need to be as informed as they can about the law and act prudently in negotiating reasonable non-compete agreements.

In our next post, we'll continue looking at several other factors judges take into account when considering the reasonableness of non-compete agreements.

Sources:

National Law Review, "Landmark Decision Affects Non-Compete Agreements in Kentucky," June 20, 2014.

Business Lexington, "Six factors to consider when drafting non-compete agreements," David Treacy & Kristeena Johnson, Oct. 24, 2015.