Are Noncompete Agreements Valid? If you want to prevent employees from leaving to work for a competitor, a noncompete agreement may not be your best bet.
By Jeffrey Steinberger •
Opinions expressed by Entrepreneur contributors are their own.
Many employers ask their employees to enter into broad noncompete agreements or employment contracts with noncompete provisions. Maybe you want to prohibit departing employees from working for a competitor or from using information they acquired while working for you. Or perhaps you just want to specify how soon an employee can begin working in a similar business. But are such noncompete agreements valid and legally enforceable?
As a general rule, noncompete agreements--often referred to as agreements or covenants not to compete--aren't valid. In most states, there's a longstanding, strong public policy against such agreements. The rationale for this policy is to ensure that employees have the right to pursue any lawful employment of their choice. For example, the California Legislature has enacted a law that declares void every contract that prevents someone from engaging in a lawful profession, trade or business of any kind. Of course, as with most laws, there are exceptions provided in the law and created by the courts.
In most states, the courts have carved out an exception to the general rule that covenants not to compete are void. They're typically permitted when deemed necessary to protect valid trade secrets of the employer. When former employees engage in unfair competition through the unauthorized use of trade secrets or confidential information, the courts will generally enforce proper noncompete agreements.
Depending on the circumstances and the language used, agreements not to compete signed by employees when starting a new job can prevent them from legally using secret formulas, recipes, certain protected customer lists and other trade secrets. Of course, merely labeling information as a trade secret or as confidential doesn't make it so. Disputes as to whether certain information is truly secret or confidential are decided by the courts on a case-by-case basis.
A similar issue arises when an employment agreement attempts to prevent a departing employee from taking other employees with them to a competitor. Such non-interference agreements aim to prohibit employees from soliciting co-workers to leave the employer. It's clearly improper for a departing employee to induce fellow employees to breach their employment contracts. On the other hand, if there's not an employment contract, nothing prohibits employees from deciding to join a colleague at a new employer. A California court considering this question decided that the particular agreement at issue was valid because the agreement didn't prohibit employees from leaving, but only prevented the departing employee from causing other employees to also leave.
While these are the general rules, each noncompete agreement must be separately considered in light of the most recent developments in the law. A lawyer-drawn agreement tailored to the law and the specifics of the employer's business will have the best chance of being binding. Therefore, employers are always advised to consult an employment law attorney when considering an agreement not to compete.
