Businesses often require employees and independent contractors to sign non-compete agreements and non-disclosure agreements. But these agreements are often contested by the people who sign them.
An agreement is simply another word for a contract. And kind of agreement can be contested if it is valid. The question here is whether the courts will uphold a non-compete agreement. There are two principles at work here:
The agreement must be valid, that is, it must meet all the criteria for being able to be considered by a court. The criteria include (a) agreement between the two parties (b) consideration (something of value given by both sides, (c) both parties must be competent (of sound mind), and (d) the contract must be for something legal.
The agreement must be considered in light of a specific state's laws on non-compete agreements. Some states will uphold non-compete agreements, while others will not. California, for example, generally does not allow non-compete agreements, with some exceptions.
What is a non-compete agreement?
A non-compete clause or agreement, sometimes called an agreement not to compete, provides a protection for an employer or a new business owner against an attempt by a former employee or former owner to set up shop nearby and compete for customers.
For example, JoEllen works for an accounting firm as a junior accountant. She passed the CPA exam and she wants to start her own accounting firm. When she joined the accounting firm, she signed a non-compete agreement restricting her in three ways:
- The area over which she is prohibited from setting up her new business,
- The number of years over which she can't set up this business, and
- The type of business she can set up.
JoEllen's non-compete agreement doesn't allow her to set up any kind of accounting service business within 8 years within a 15-mile radius from the old accounting business.
Non-compete Agreements, Reasonableness, and Restraint of Trade
Non-compete agreements are usually overturned by a court based on whether they are reasonable. Reasonableness has to do with the concept of restraint of trade. Does the agreement unreasonably keep someone from doing business (that is, engaging in trade)? in these cases, the restrictions are viewed based on the specific type of business, area, and time. In JoEllen's case above, a reasonable area would depend on the population of the area and the number of other accounting firms.
Contesting a Non-compete Agreement means taking it to court. Courts decide the reasonableness of non-competes on a case-by-case basis.
What Happens if You Break a Non-compete Agreement
Let's say JoEllen wants to leave her current firm and set up a competing business within the radius and time of the non-compete agreement. In other words, she wants to break the agreement. This is called breach of contract, If the accounting firm thinks she has breached the contract by breaking the non-compete, they could start legal action against her.
The first thing JoEllen's former employer would do is find a judge to put an injunction (stop order) on her to stop her from engaging in business and taking the other party's customers until the case was litigated (brought to court). This court process might take years. Meanwhile, she would have to stop doing business or move out of the area.
Even if JoEllen wins in court and is allowed to continue in business, it's many years, and many, many dollars to attorneys later before she could get satisfaction. Is it worth it? Not usually. Even if the agreement is not enforceable or outrageous, and a judge finally sides with her, she can't win; only the attorneys do.
Contesting a Non-compete Agreement: The Best Advice
The only way you can contest a non-compete agreement is to break it. Unfortunately, that means setting up a new business of the same type within the prohibited distance and time. Even if you think the terms of the agreement are unreasonable, there's no way to test the agreement without doing something that would get a lawsuit started.
If you are thinking about contesting a non-compete agreement you have already signed, first get an opinion from an experienced attorney.
The best time to change a non-compete agreement is during the hiring process. But that's usually not the best time to negotiate because you probably want the job and you don't want to start a fight. You could also get a legal opinion at this point before you sign.
If you don't feel the non-compete is valid, you can either not sign it and not get the job, or sign it and just decide to avoid trying to contest it.
Disclaimer Non-compete agreement agreements are decided on a case-by-case basis. It's impossible to predict what a court might decide. The information in this article is intended as a general overview, not legal advice. Get the help of an experienced attorney before you sign a non-compete or you want to break one.