Protection of noncompetition agreements

Noncompetition agreements between employers and employees prohibit the employee from competing against the employer upon departing the company. Most noncompetition agreements restrict employees from working for a competitor, starting their own competing company and/or disclosing confidential information. If not properly drafted, however, courts will not enforce the terms of a noncompetition agreement.

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The general rule is that noncompetition agreements will be enforced if they are reasonable. To be reasonable, the restrictions contained in a noncompetition agreement may not extend beyond that which is necessary to protect an employer’s business. No matter how reasonable, however, a noncompetition agreement cannot prevent an individual from earning a living. In other words, if an employee’s skills are not transferable among industries, courts may not enforce the noncompetition agreement if the enforcement of the agreement would result in the employee’s inability to find employment.

Reasonableness in the context of noncompetition agreements is a moving target and cannot be easily defined. Instead, courts may look at the time limitations, geographic scope and other restrictions set forth in the noncompetition agreement.

A time restriction that is too long or indefinite in duration is not reasonable. When thinking about the time limitation of the noncompetition agreement, factors to be considered are the rate at which company assets and information become “stale”, customer turnover and the average time between customer purchases. Typically, noncompetition agreements terminate within one or two years.

A noncompetition agreement must also be limited to the employer’s actual market. A company conducting business solely in Rhode Island and Massachusetts can typically restrict an employee from competing with the company in those states, but not in other unrelated states.

A national company, on the other hand, may have a legitimate reason to restrict an employee from competing anywhere in the United States. This point can be of particular concern to Internet companies whose market is potentially the entire United States, if not worldwide.

Another key factor to consider is that, in order for a noncompetition agreement to be enforceable, the employee must receive “consideration”.

In other words, the employer must give the employee something of value in exchange for the employee’s signature. Many states allow such consideration to be the job itself. Other states, however, require an employer to give the employee something more, such as a bonus, a promotion or stock options.

Even after you take the time to draft a reasonable noncompetition agreement, paying particular attention to its time limitation and geographic scope, the agreement may still not be enforceable. Certain states do not recognize and enforce any noncompetition agreements between employers and employees. Most states, however, including Rhode Island, will enforce noncompetition agreements so long as they do not contain unreasonable restrictions.

Noncompetition agreements are a necessary tool to protect your business from being stripped of important and proprietary assets and information. Careful consideration of the laws governing the enforceability of noncompetition agreements is, however, crucial in each state where your company maintains a workforce to ensure that employees will be bound by the terms of the agreements they sign.

Joshua M. Erickson is an associate in the Corporate and Securities and Technology Law Practice Groups of Hinckley, Allen & Snyder LLP.