A non-compete agreement is a formal contract between an employer and employee for a specific geographic location and time period that outlines what information the employee cannot share outside the company. No matter what geography may be specified within the agreement for information sharing, non-compete covenants are not federally enforced. Instead, such agreements are enforced according to state laws and statutes, and as such, enforceability varies widely. Furthermore, not all states recognize the validity of such covenants.

How the Court Views a Non-Compete Agreement

When a legal case involving a non-compete agreement arises, the primary basis of consideration is whether the agreement is reasonable. Legally speaking, the agreement will be considered reasonable if:

  • The employer establishes that it will be harmed in some way without enforcement.
  • The time period of the agreement is suitable and not unduly lengthy for the job and authority level of the employee.
  • The geographical area in question is adequate but not over-reaching. For instance, if your company only sells in Florida, it might be unreasonable to prevent you from working for a competitor that sells only in Alaska
  • The agreement does not keep the employee from making a living using her skills or experience. Views on this vary by state, but generally the agreement should not prevent you from working at all without relocation or prevent you from working in an entire sector.
  • The agreement does not harm the competition within the employer's industry or create an unfair monopoly.

How States Rule on Non-Compete Agreements

The state in which the employee primarily works is the state responsible for ruling on a dispute. In states that do recognize non-compete agreements, the degree of legal enforceability differs greatly.

For example, in Texas, a non-compete is only enforceable if it meets two other criteria:

  1. The agreement must be necessary to support other employer/employee agreements. In Texas and in other states, this often means that the employer makes promises to the employee such as compensation and benefits during employment in exchange for the employee's agreement not to compete.
  2. The agreement must be deemed reasonable. Texas courts, like courts in other states, use the general guiding principles defining reasonability when making a determination.

On the opposite end of the spectrum is California, where non-compete agreements are rarely enforced in any circumstances. This does not mean you should simply ignore a non-compete agreement if you reside in California, however. Goodwill with the former employer and your reputation in the industry are still at stake.

States such as Florida have laws on the books making it more difficult to enforce non-compete agreements. Courts in many states will look at unreasonable covenants and either void or re-word them, and very often put the burden of proof on the employer. If your agreement was made in Virginia, enforcement of non-compete contracts heavily favors the employee over the employer.

Read your contract carefully to determine what you actually agreed to. Chances are good that you can avoid violating the agreement fairly easily:

  • Can you avoid activities that compete? A reasonable agreement does not ban you from working at all, nor from going into business for yourself. It only bans direct competition. If you sold dental supplies with your former employer and now want to sell clothing, you are not competing.
  • Can you avoid the specified geographical area? If the area is reasonable and you want to compete directly, simply avoiding the area specified can keep you out of legal trouble.
  • Can you wait until the agreement expires? Reasonable agreements, especially in today's business climate, often will not extend past a few months or quarters. You may be able to wait it out using savings, working temporarily, or getting funding for your own business before you start working competitively.

Consult an attorney with employment law experience before taking any legal or negotiating action. Challenges are often seen as valid if:

  • The specified time period or geographical area is too broad.
  • The only purpose of the agreement was to prevent you from working.
  • The employer did not uphold their end of the agreement.

If challenging your contract is legally advised before starting your own business, you may be able to reach a settlement with your former employer out of court. In fact, most employers prefer to work out a compromise without the extensive costs, resources, and risk associated with a court battle.

If you need help with non-compete agreements, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.