NON-COMPETE CLAUSE

A 'non-compete clause', or 'covenant not to compete' ('CNC'), is a term used in contract law under which one party (usually an employee) agrees to not pursue a similar profession or trade in competition against another party (usually the employer). As contract provisions, a CNC is bound by traditional contract requirements, including the consideration doctrine. The use of such clauses is premised on the possibility that upon his or her termination or resignation, the employee might begin working for a competitor or starting a business, and gain competitive advantage by abusing intimate knowledge of the employer's operations to release trade secrets or sensitive information such as customer/client lists, business practices, upcoming products, and marketing plans.
Conversely, a business might abuse a non-compete covenant to prevent an employee from working elsewhere at all.
Most jurisdictions in which such contracts have been examined by the courts have deemed them to be legally binding, so long as the clause contains reasonable limitations as to the geographical area and time period in which an employee of a company may not compete. Courts have held that, as a matter of public policy, an individual can not be barred from carrying out a trade in which he has been trained except to the extent that is necessary to protect the employer.
These are becoming more popular among companies within the United States and abroad and may or may not be enforceable in particular states within the United States.

Contents

Enforceability in the Commonwealth of Virginia

Legitimate business interest

Reasonable restriction on employee's ability to earn a living

Public policy

Enforceability in the State of California

Out of state agreements are not enforceable

Exceptions - valid non-compete agreements in California

External links

Enforceability in the Commonwealth of Virginia

In Virginia, the enforceability of covenants not to compete are governed by common law principles. As restrictions on trade, CNCs are not favored by Virginia courts, which will only enforce narrowly drafted CNCs that do not offend public policy.
In Virginia, a plaintiff must prove by a preponderance of the evidence that the covenant is reasonable in the sense that it is: (1) no greater than necessary to protect its legitimate business interests, such as a trade secret; (2) not unduly harsh or oppressive in restricting the employee’s ability to earn a living; and (3) not against public policy. ''Paramount Termite Control Co., Inc v. Rector'', 380 S.E.2d 922, 924 (Va. 1989).

Legitimate business interest

In Virginia, courts weigh the (1) function, (2) geographic scope and (3) duration of the CNC against the employer’s legitimate business interests to determine its reasonableness. See ''Advanced Marine Enters., Inc. v. PRC Inc.'', 501 S.E.2d 148, 155 (Va. 1998); ''Simmons v. Miller'', 544 S.E.2d 666, 678 (Va. 2001) (stating that the function, geographic scope and duration of the CNC must be considered together to determine the reasonableness of the restriction). Additionally, CNCs are only reasonable if they prevent the employee from entering into direct competition with the employer and must not encompass any activity in which the employer is not engaged. See e.g. ''Omniplex World Servs. Corp. v. US Investigations Servs., Inc.'', 618 S.E.2d 340, 342 (Va. 2005) (“covenants not to compete have only been upheld when employees are prohibited from competing directly with the former employer or through employment with a direct competitor.”); See ''Motion Control Sys. v. East'', 546 S.E.2d 424 (Va. 2001).

Reasonable restriction on employee's ability to earn a living

Second, to enforce the CNC, a Plaintiff must show that it is not unduly harsh or oppressive in restricting the employee's ability to earn a living. In Virginia, a CNC is not unduly harsh or oppressive if balancing its function, geographic scope and duration the employee is not precluded from (1) working in a capacity not in competition with the employer within the restricted area or (2) providing similar services outside the restricted area. See ''Paramount'', 380 S.E.2d at 925.

Public policy

Third, to enforce a CNC, a Plaintiff must show the CNC is reasonable from the standpoint of a sound public policy. Virginia does not favor restrictions on employment and therefore CNCs are generally held against public policy unless they are narrowly drafted as enumerated above. In Virginia, a CNC does not violate public policy if the restrictions it imposes do not create a monopoly for the services offered by the employer or create a shortage of the skills provided by the employee. See ''Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick'', 389 S.E.2d 467, 470 (Va. 1990); ''Paramount'', 380 S.E.2d at 925.

Enforceability in the State of California

Unlike the situation in other states, non-compete agreements are illegal in California and against public policy. (California Business and Professions Code Section 16600).

Out of state agreements are not enforceable

The preeminent court decision discussing the conflict between California law and the laws of other states is ''Application Group, Inc. v. Hunter Group, Inc.'', 61 Cal.App.4th 881 (1998). In ''Hunter'', a Maryland company required that its Maryland based employee agree to a one-year non-compete agreement. The contract stated that it was governed by and to be construed according to Maryland law. A Maryland employee then left to work for a competitor in California. When the new California employer sued in California state court to invalidate the covenant not to compete, the California court agreed and ruled that the non-compete provision was invalid and not enforceable in California. Business and Professions Code Section 16600 reflects a "strong public policy of the State of California" and the state has a strong interest in applying its law and protecting its businesses so that they can hire the employees of their choosing. California law is thus applicable to non-California employees seeking employment in California.
Whether California courts are required by the full faith and credit clause of the United States Constitution to enforce equitable judgments from courts of other states, having personal jurisdiction over the defendant, that enjoin competition or are contrary to important public interests in California is an issue that has not yet been decided.

Exceptions - valid non-compete agreements in California

There are limited situations where a reasonable non-compete agreement may be valid in California.

(1) If an owner is selling the goodwill in their business. (Business & Professions Code Section 16601).

(2) When there is a dissolution or disassociation of a partnership. (Business & Professions Code Section 16602).

(3) Where there is a dissolution of a limited liability company. (Business & Professions Code Section 16602.5).

External links

★ California Non-Compete Agreement Law and Cases