Business, Legal & Accounting Glossary
A non-compete clause or covenant not to compete (CNC), is a term used in contract law under which one party (usually an employee) agrees to not pursue a similar profession or trade in competition against another party (usually the employer). As contract provisions, a CNC is bound by traditional contract requirements, including the consideration doctrine. The use of such clauses is premised on the possibility that upon his or her termination or resignation, the employee might begin working for a competitor or starting a business, and gain competitive advantage by abusing intimate knowledge of the employer’s operations to release trade secrets or sensitive information such as customer/client lists, business practices, upcoming products, and marketing plans.
Conversely, a business might abuse a non-compete covenant to prevent an employee from working elsewhere at all. Most jurisdictions in which such contracts have been examined by the courts have deemed them to be legally binding, so long as the clause contains reasonable limitations as to the geographical area and time period in which an employee of a company may not compete. Courts have held that, as a matter of public policy, an individual can not be barred from carrying out a trade in which he has been trained except to the extent that is necessary to protect the employer.
The majority of U.S. States recognize and enforce various forms of non-compete agreements. In converse, a few States, such as California, totally ban or prohibit non-compete agreements. For this reason, non-compete agreements have been popular among companies with employees working in states where they are allowed.
In Virginia, the enforceability of covenants not to compete is governed by common law principles. As restrictions on trade, CNCs are not favoured by Virginia courts, which will only enforce narrowly drafted CNCs that does not offend public policy.
In Virginia, a plaintiff must prove by a preponderance of the evidence that the covenant is reasonable in the sense that it is: (1) no greater than necessary to protect its legitimate business interests, such as a trade secret; (2) not unduly harsh or oppressive in restricting the employee’s ability to earn a living; and (3) not against public policy. Paramount Termite Control Co., Inc v. Rector, 380 S.E.2d 922, 924 (Va. 1989).
In Virginia, courts weigh the (1) function, (2) geographic scope and (3) duration of the CNC against the employer’s legitimate business interests to determine its reasonableness. See Advanced Marine Enters., Inc. v. PRC Inc., 501 S.E.2d 148, 155 (Va. 1998); Simmons v. Miller, 544 S.E.2d 666, 678 (Va. 2001) (stating that the function, geographic scope and duration of the CNC must be considered together to determine the reasonableness of the restriction). Additionally, CNCs are only reasonable if they prevent the employee from entering into direct competition with the employer and must not encompass any activity in which the employer is not engaged. See e.g. Omniplex World Servs. Corp. v. US Investigations Servs., Inc., 618 S.E.2d 340, 342 (Va. 2005) (“covenants not to compete have only been upheld when employees are prohibited from competing directly with the former employer or through employment with a direct competitor.”); See Motion Control Sys. v. East, 546 S.E.2d 424 (Va. 2001).
Second, to enforce the CNC, a Plaintiff must show that it is not unduly harsh or oppressive in restricting the employee’s ability to earn a living. In Virginia, a CNC is not unduly harsh or oppressive if balancing its function, geographic scope and duration the employee is not precluded from:
Third, to enforce a CNC, a Plaintiff must show the CNC is reasonable from the standpoint of a sound public policy. Virginia does not favour restrictions on employment and therefore CNCs are generally held against public policy unless they are narrowly drafted as enumerated above. In Virginia, a CNC does not violate public policy if the restrictions it imposes do not create a monopoly for the services offered by the employer or create a shortage of the skills provided by the employee. See Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick, 389 S.E.2d 467, 470 (Va. 1990); Paramount, 380 S.E.2d at 925.
Unlike the situation in other states, non-compete agreements are illegal in California and against public policy. (California Business and Professions Code Section 16600).
The preeminent court decision discussing the conflict between California law and the laws of other states is Application Group, Inc. v. Hunter Group, Inc., 61 Cal.App.4th 881 (1998). In Hunter, a Maryland company required that its Maryland based employee agree to a one-year non-compete agreement. The contract stated that it was governed by and to be construed according to Maryland law. A Maryland employee then left to work for a competitor in California. When the new California employer sued in California state court to invalidate the covenant not to compete, the California court agreed and ruled that the non-compete provision was invalid and not enforceable in California. Business and Professions Code Section 16600 reflects a “strong public policy of the State of California” and the state has a strong interest in applying its law and protecting its businesses so that they can hire the employees of their choosing. California law is thus applicable to non-California employees seeking employment in California.
Whether California courts are required by the full faith and credit clause of the United States Constitution to enforce equitable judgments from courts of other states, having personal jurisdiction over the defendant, that enjoin competition or are contrary to important public interests in California is an issue that has not yet been decided.
There are limited situations where a reasonable non-compete agreement may be valid in California.
As in other states, Ohio courts at one time viewed noncompetition agreements with some scepticism. Agreements in restraint of trade, including noncompetition agreements, were disfavored as being against public policy. Further, the law initially developed in a society in which workers entered skilled trades only by serving apprenticeships, and mobility was minimal. Hence, restrictive covenants precluding an ex-employee from competing with his ex-employer “either destroyed a man’s means of livelihood or bound him to his master for life.” Raimonde v. Van Vlerah (1975), 42 Ohio St.2d 21, 71 Ohio Op. 2d 12, 325 N.E.2d 544.
Much has changed in Ohio since then. In 2004 the Ohio Supreme Court noted that modern economic realities do not justify a strict prohibition of noncompetition agreements between employer and employee in an at-will relationship. Instead, Ohio courts now balance an employer’s ability to protect its trade secrets, customer relationships and other legitimate business interests against the employee’s ability to earn a living.
Accordingly, courts in Ohio now recognize the validity of agreements that restrict competition by an ex-employee if they contain reasonable geographical and temporal restrictions. Such an agreement does not violate public policy if it is reasonably necessary for the protection of the employer’s business, and not unreasonably restrictive upon the rights of the employee.
At one time employees in Ohio argued that a non-competition agreement was unenforcable for lack of consideration unless it was required as a condition to, and at the time of, new employment. This view was supported by the facts of Rogers v. Runfola & Assoc., Inc. (1991), 57 Ohio St.3d 5, 565 N.E.2d 540, in which the Ohio Supreme Court found valid a noncompetition clause in a written contract in which the employer agreed to discharge the employee only for specified reasons. In Runfola, the Ohio Supreme Court rejected the argument of the ex-employee that her promise not to compete lacked consideration in light of the “the exchange of mutually beneficial promises.” From this, employees argued that a non-competition agreement required valid cause for termination or some other consideration.
In Lake Land Empl. Group of Akron, LLC v. Columber, 101 Ohio St. 3d 242, 245-246 (Ohio 2004), however, the Ohio Supreme Court held that continued at-will employment was sufficient consideration to support a non-competition agreement. The Court viewed presentation of a noncompetition agreement by an employer to an at-will employee as, in effect, a proposal to renegotiate the terms of the parties’ at-will employment. As a result, an employer can require non-competition agreements from all of its employees and can terminate, without legal liability, those employees who refuse to sign.
Since non-competition agreements are contracts, the ability of one employer to enforce a non-competition agreement entered into with another employer depends on the law of contract assignment. As a general rule, a party to a contract can assign the contract to another party, unless the contract does not permit the assignment. Thus, unless the non-competition agreement itself prohibits an assignment, the agreement can probably be assigned to another employer, who would then have the right to enforce it.
If the parties enter into a valid non-competition agreement, then Ohio courts will enforce it in light of the guidelines pronounced in Raimonde v. Van Vlerah (1975), 42 Ohio St. 2d 21, 71 O.O. 2d 12, 325 N.E. 2d 544. In Raimonde, the Ohio Supreme Court held:
A covenant not to compete which imposes unreasonable restrictions upon an employee will be enforced to the extent necessary to protect an employer’s legitimate interests. A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee, and is not injurious to the public.
If the restraint from a covenant not to compete is greater than that required for the protection of the employer, Ohio courts are empowered to fashion a reasonable covenant between the parties and, in so doing, they should consider the following factors:
The absence or presence of limitations as to time and space, Whether the employee represents the sole contact with the customer; Whether the employee is possessed with confidential information or trade secrets; Whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition; Whether the covenant seeks to stifle the inherent skill and experience of the employee; Whether the benefit to the employer is disproportional to the detriment to the employee; Whether the covenant operates as a bar to the employee’s sole means of support; Whether the employee’s talent which the employer seeks to suppress was actually developed during the period of employment; and Whether the forbidden employment is merely incidental to the main employment.
Courts will rewrite overly broad non-competition agreements by redrawing geographic, time or other restrictions on an employee’s non-competition agreement.
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This glossary post was last updated: 25th April, 2020 | 0 Views.