Do Non-Compete Agreements Work?

Protect yourself against competition from ex-workers.
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This story appears in the April 2006 issue of Entrepreneur. Subscribe »

Two employees resigned from New Jersey-based Picture Window Software LLC and launched a competing company. Picture Window sued, hoping to stop the two from using proprietary information. But the court said that people are free to compete with former employers unless there's an enforceable contract not to do so.

Anyone with employees would love to be able to keep them from going to work for a rival or starting a competing business. After all, they might know your trade secrets, marketing strategies, customers and plans. But as the New Jersey court pointed out when it ruled on this case in 2004, the only way to do that is with a noncompete agreement offered and signed either when the employee is hired or in exchange for something of value, such as a promotion or a pay raise. Even then, U.S. courts tend to dislike these agreements because they restrain free trade and can make it impossible for people to earn a living in their fields.

One key question is whether the agreement is reasonable and fair. For instance, it wouldn't be fair to expect a former employee not to work in his or her field for 10 or 20 years. But a court would be more likely to uphold a covenant restricting the employee from working for a direct competitor within a 10-mile radius for two years. Be reasonable, or you may find you have no protection at all.

Jane Easter Bahls is a writer in Rock Island, Illinois, specializing in business and legal topics.
Edition: July 2017

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