Duhaime's Law Dictionary


Non-compete Agreement Definition:

An agreement on the part of a departing employee restricting, in some way, same-industry employment.

Related Terms: Restrictive Covenant, Employee Choice Doctrine, Nondisclosure Agreement

Also known as a covenant not to competerestrictive covenants or employee agreements not to compete.

In BDO Seidman, Justice Levine of the Court of Appeals of the State of New York:

"In the 19th century, a standard of reasonableness for judging the validity of such agreements developed in case law here and in England, balancing the need of fair protection for the benefit of the employer against the opposing interests of the former employee and the public.

"The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test. A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. A violation of any prong renders the covenant invalid....

"In this context a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer's legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.

"In general, we have strictly applied the rule to limit enforcement of broad restraints on competition. Thus, in (one previous case) ..., we limited the cognizable employer interests under the first prong of the common-law rule to the protection against misappropriation of the employer's trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary.

"With agreements not to compete between professionals, however, we have given greater weight to the interests of the employer in restricting competition within a confined geographical area. In (previous cases), we enforced total restraints on competition, in limited rural locales, permanently in (one case) and for five years in (another). The rationale for the differential application of the common-law rule of reasonableness expressed in our decisions was that professionals are deemed to provide unique or extraordinary services...."

Further, these words of Justice Pigott of the Court of Appeals of New York in Morris v Schroder:

"[N]oncompete clauses in employment contracts are not favored and will only be enforced to the extent reasonable and necessary to protect valid business interests."

Some jurisdictions have wisely taken this area of employment law out of the hands of judicial discretion, at least to a certain degree, and have codified the law. For example, consider §15.50(a) of the Texas Business and Commercial Code (as of January 2011), entitled Criteria for Enforceability of Covenants Not to Compete:

"...a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee."

REFERENCES:

  • BDO Seodman v Hirshberg, 712 NE 2d 1220 (1999)
  • Duhaime, Lloyd, Employment Law
  • Morris v. Schroder Capital, 859 NE 2d 503 (2006)

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