According to the English philosopher Francis Bacon, “A man must make his opportunity as oft as find it.”
Preventing a person from making his opportunity runs counter to the American ethos that a person should have the freedom to work wherever and whenever the person desires. This notion has been tempered by contractual and equitable principles that a person can bargain away or limit his freedom to work under certain circumstances as manifested in non-compete agreements (or covenants not to compete). Courts loathe to deprive someone of the ability to make a living. The following commentary is a generic discussion of this kind of an agreement.
Non-compete agreements commonly are used in two situations: employment and business purchase agreements. To be a valid contract, a non-compete agreement also must be supported by “legal consideration,” which means the price bargained and paid for a promise (it may be a return promise, an act, or a forbearance).
Most courts closely scrutinize non-compete agreements as they are restraints on trade and considered to be contrary to public policy. A non-compete agreement is unenforceable where its sole purpose is to restrict competition without other justifying factors. Because there is more of an arm’s length bargaining position of the parties, non-compete agreements arising from the purchase of business assets are viewed more favorably by courts. A court will ordinarily sustain a non-compete agreement that is necessary to protect the promisee’s legitimate proprietary or business interests.
The court’s determination of the validity of a non-compete agreement is done by examining whether the terms are reasonable. The circumstances of each case will drive this determination. Reasonableness is measured by the scope of the territory, duration, the type of restricted activity, the hardship on the promising party, and the effect on the general public. The longer the duration and the larger the geographic territory, the more likely a court could find such terms as overbroad and contrary to public policy and, therefore, unenforceable.
The lack of any geographic limitation can be problematic, and without some legitimate qualifier on the prohibited activity placed on promisor, such as the promisor not soliciting particular existing customers of promisee, the covenant could be invalidated. Typically, non-compete agreements have a duration from six months to three years. In a sale-of-a-business situation, one court allowed five-years, because the agreement did not prohibit the selling party from engaging in all business activity, just the kind of activities that competed with the business subject to the sale agreement.
To enforce a non-compete agreement, a promisee often will seek an injunction against the promisor. Sometimes a promisor will file an action for declaratory judgment seeking to invalidate a non-compete agreement. Depending on the circumstances, monetary damages could be awarded as well as attorneys fees to the prevailing party.
This article was originally published in Lorman.com Newsletter Legal Update.
Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.