Non-compete Agreements Need a Geographic Location

In a lawsuit between an employer and an employee, a non-compete agreement that restricted employees from “working for companies competitive with the employer” and “in locations where they employee marketed or sold products” was not reasonable in geographic scope nor was it defined well enough to be enforced. The court rendered it unenforceable leaving the employer without a remedy. This is one more reminder that non-compete agreements must be reasonable in both time and geographic scope. The guiding principle is the least restriction on the employee’s ability to obtain new job and reasonably necessary to protect the employer’s interest.

It may be a good idea to review your company documents with your attorney to be sure they will be enforceable when you need them.

When to consider a non-disclosure or non-compete agreement

If you are an employer for a business which grants its employees access to sensitive information or relies on proprietary information, you may want to consider a non-disclosure or non-compete agreement for your employees and consultants that have access to this information. This not only protects the information of your clients, but it also protects the investment you have made in developing the information that gives you a competitive advantage in the marketplace. You invested time and financial resources in developing information – why let your competitors benefit from your hard work and investment?

A non-disclosure agreement is a contract that prohibits the employee from divulging sensitive information learned while employed at the business. This type of work often includes many things. A few examples are handling credit information, internal vendor lists and pricing schedules, managing e-mail exchange servers or public relations duties involving hiding clients’ damaging secrets.

A non-compete agreement is a contract in which the employee promises not to work for competitors for a pre-agreed period of time after the current employment terminates in order to protect the business’s proprietary information. A non-compete agreement is often used for employees who work with client lists or trade secrets that the employer wants to keep from competitors, or when the employee possesses a unique talent or skill that would give competitors an unfair edge. It is important to balance the interest between the employee’s right to earn a living and the employer’s right to protect its proprietary information. To be enforceable, the courts generally must be sure that the restrictions are reasonable in terms of both geographical (distance) and time limitations.

These promises concerning non-disclosures or non-competes are commonly called “restrictive covenants’, and like all contracts, they require that both parties receive something of value. In many cases, the employee agrees to the restrictive covenants in exchange for employment at a particular salary. This is why most non-disclosure and non-compete agreements are drawn at the beginning of employment. Generally, both parties must be exchanging something of value to change the agreement between them. While some have successfully argued that continued employment is a benefit when the general rule is employment at will, others have successfully defended on the basis that you cannot change the agreement on an already existing job mid-employment; however, in these cases, you could offer a bonus or a promotion.

Non-disclosure and non-compete agreements are first and foremost deterrent mechanisms, but there are times when a breach of contract occurs and enforcement is necessary. The first step to enforcing a non-disclosure or non-compete is to send a Demand letter. The letter has four key points: (1) remind the breaching party of the existing contract and its terms; (2) explain where the breach occurred; (3) demand the breaching party comply with the terms within a certain amount of time (for example, 10 days); and (4) Warn of the legal consequences for failure to comply.

Unfortunately, Demand letters are often ignored, and court relief becomes the next available option. Breaking a non-disclosure agreement generally means that the breaching party has already disclosed the information, so the most commonly sought legal recourse is monetary relief. The plaintiff is responsible for convincing the court that the sum of money sought represents the total damages resulting from the breach.

Non-competes are enforced with court injunctions that force the breaching party to cease the breaching and infringing action or face contempt of court. In the state of New York, non-compete agreements are particularly difficult to enforce, as the courts have a strong policy against preventing people from being able to work, and a non-compete essentially limits a former employee’s prospects for future employment. In order to be considered enforceable, the non-compete must either protect particular trade secrets or confidential client lists or protect the employer from competitors by employees with special skills. The non-compete must also be reasonably in duration and limited to a relevant geographical area. All of these criteria are, of course, highly debatable and heavily litigated. It is important to seek experienced legal advice when drafting agreements for your employees and consultants to ensure that that they are enforceable.