Be Wary of State-Specific Requirements for Noncompetition Agreements

One size most certainly does not fit all when it comes to noncompetition agreements.  Every state has its own requirements when it comes to the enforceability of employee noncompetition agreements.  In some, such as California, noncompetition agreements are unlawful by statute.  In other states, such as Colorado, noncompetition agreements may only be enforced in certain specific settings, such as the sale of a business.  In many states, however, noncompetition agreements will be enforced if they protect the company’s legitimate business interests and are reasonable in time, geographic scope and the scope of the limitations on the employee’s ability to perform his profession.  Where noncompetition agreements are not void as a matter of law, they are great fodder for litigators because there is no uniform definition of “legitimate business interest” and no consistent test to determine if the time, geographic scope and the scope of limitations on the employee’s ability to perform his profession are “reasonable.”  These criteria are very fact and case specific.

Although most litigation of noncompetes focuses on whether the business interests of the employer are “legitimate,” and/or if the geographic and temporal scopes of the limitations are “reasonable.” Equally important to the enforceability of a noncompete is the consideration provided in exchange of the employee’s agreement to limit her employment rights after termination of her employment.  Indeed, providing consideration to the employee is a precondition for any noncompete to be enforceable; but again, different jurisdictions have different rules when it comes to such consideration.

In some states, whether consideration is adequate, especially in an “at will” situation, depends upon timing.  New Hampshire recently enacted HB 1270, requiring that “any non-compete or non-piracy agreement that is part of the employment agreement to the employee or potential employee,” be provided to the employee “prior to or concurrent with making an offer of change in job classification or an offer of employment.”  In Oregon, a noncompetition agreement must be presented to a candidate for employment with a written job offer at least two (2) weeks in advance of the employee’s start date.  In Massachusetts, “at will” employment or continuation of “at will” employment is sufficient consideration for a post-employment noncompetition restriction.  As such, having an “at will” employee sign a noncompete even after he has been working for a  period of time will not invalidate the noncompetition agreement.  If, however, the employment relationship changes materially after the noncompetition agreement is signed, in Massachusetts at least, a court could find that the previously valid non-competition agreement is no longer valid.

Yet another state-specific issue with respect to noncompetition agreements is the modification by a court of a provision that is deemed overly broad.  Some courts will “blue pencil” the provision, that is, strike the overly broad provision and enforce the remaining provisions (if enforceable in the absence of the stricken provision).  In other states, courts will or are required to, modify an overly broad provision to make it reasonable.

Because so many of the factors that play into the enforceability of noncompetition agreements are state-specific, in-house counsel for multi-state businesses need to be aware that each state in which the company has employees may have different views on validity, interpretation, modification and enforcement of noncompetes.  Although it’s often easier and less time-consuming to work with templates, noncompetition agreements are one area where using templates could result in a loss of substantial competitive advantage. 

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