Iron-clad non-competes: will your agreement hold up in court?

• Author: Call, Keith A.
• Position: Legal Brief

If you are an employee who thinks your non-compete agreement is unenforceable, think again.

If you are an employer who thinks your non-compete agreement is enforceable, think again.

The world of non-compete agreements is a tricky place. The law is often murky and inconsistently applied. The changing business climate, including the emerging and ever-dynamic trend of e-commerce, raises novel issues to which precedent-bound courts must try to adapt. Fundamental concepts like "free market competition" and "freedom to contract" come into direct conflict. This has led to many misperceptions--and expensive lawsuits--concerning the enforceability of non-compete agreements.

The good news for employers is that courts will enforce properly drafted noncompete agreements. The good news for employees is that employers often fail to properly draft such agreements, and courts will not enforce them if they are imposed for an improper purpose or are overbroad in their scope.

Legitimate Business Purpose

Speaking generally, courts will enforce non-compete agreements only if they serve a "legitimate purpose." Such purposes include the protection of trade secrets or company goodwill.

A Utah statute defines a "trade secret" as information that "derives independent economic value from not being generally known to, and not being readily ascertained by proper means" and "is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." It is therefore important for employers to have in place controls against unnecessary disclosure of potential trade secrets.

Goodwill can include a likelihood that the employee may draw away customers (and perhaps employees) from the employer if he were permitted to compete. Courts will often consider whether the employee rendered services that were in some way special, unique or extraordinary.

Time and Space Limitations

Courts will not enforce non-compete agreements that are unreasonable in scope, such as being too long in duration or extending beyond the employer's geographic area or market space. Much of today's non-compete litigation centers on these amorphous concepts, making it critical for the agreement to be properly drafted.

There is no bright-line test by which to determine what a reasonable period of non-competition would be. The employer should consider, for example, how long it would take for a replacement employee to establish the customer goodwill the employer seeks to protect. In most...