Noncompete agreements—also known as noncompetition agreements or restrictive covenants—are contracts or agreements that attempt to restrict an employee’s ability to work for a competing company or to contact or solicit the current employer’s customers or clients upon termination of the employee’s employment.
The enforceability of a noncompete agreement is often based on the employer’s contractual obligation (in the noncompete agreement) to provide the employee with confidential, trade secret information—often defined to include job training and names, contact information, and buying preferences of the employer’s customers or clients—or merely on the employee’s access to this information during the course of employment.
If the employer provides the employee with information that constitutes confidential, trade secret information, the employer’s attempt to restrict the employee’s ability to compete against the employer (following termination of employment) may be seen as more than a bare or naked restraint of trade and therefore valid—as most state legislatures and courts are not willing to limit a former employee’s ability to work in the same industry or geographic location unless the employer has an interest worthy of protection—such as trade secrets that might be unfairly used or disclosed.
But whether the information provided to an employee constitutes trade secrets or confidential information worthy of legal protection is one of the most contested issues in lawsuits seeking to enforce noncompete agreements against former employees. Laws vary from state to state but a trade secret is generally defined to include information (1) whose secrecy has been protected by reasonable measures and (2) that has independent economic value because it is not generally known or ascertainable.
Noncompete agreements typically include a definition of what constitutes confidential, trade secret information under the agreement, and the term or duration of the agreement may be limited to a certain period of time—usually a number of years—in which the employee may be restricted from (1) working for one of the former employer’s competitors, or (2) calling on or soliciting customers or clients of the former employer. Noncompete agreements often seek to restrict the former employee’s ability to compete only in a certain geographic location (city, county, state, region) to increase the likelihood of the agreement being enforced.
Noncompete agreements also usually include a provision stating that if the employee violates the agreement the employer would not have an adequate remedy at law—meaning money damages awarded by a judge or jury would not adequately compensate the employer whose confidential, trade secret information has been or may be improperly used or disclosed—and a court may enter an injunction ordering the former employer not to work in violation of the noncompete agreement and not to use or disclose confidential, trade secret information—or face additional penalties, such as civil and criminal contempt of court for violating the court’s order.
Lawsuits to enforce noncompete agreements usually assert one or more claims for (1) breach of contract (the noncompete agreement), (2) misappropriation or theft of trade secrets, (3) disclosure or threatened disclosure of confidential information and trade secrets (the inevitable disclosure doctrine), or (4) interference with contractual relationships—between the employer and the former employee and between the employer and its customers.
Because noncompete agreements are contracts they are generally governed by state contract law and unfair competition laws. Unfair competition laws regarding the enforceability of noncompete agreements and the protection of trade secrets are usually located in a state’s statutes. The question of which state’s law applies to a noncompete agreement is generally determined by (1) whether the parties agreed to the applicable law in the agreement (a choice-of-law provision), (2) where the parties are located—the employer’s corporate headquarters and the employee’s residence, and (3) other relevant facts and circumstances.