United States: Protect Your Company Assets

A business partner, yearning to be her own boss, opens a competing business across town from her former partners and wishes to contact the clients she cultivated while there. A senior company officer in a highly competitive industry becomes frustrated with his situation and, lured by higher pay, decides to work for a chief competitor, taking with him years of accumulated technological information and strategy. A doctor, after a dispute with her colleagues, decides to move her general practice to a nearby community, which has no doctors.

If you are one of these individuals and have signed a noncompetition agreement, you cannot simply walk away and change jobs. Or can you?

Noncompetition agreements are contracts, typically between employer and employee, that prohibit the employee from competing against the (former) employer for a specified duration and within a designated geographic area. Some noncompetition agreements preclude an employee from working for a particular competitor, contacting specific customers or disclosing certain information.

In a world of increasing employee mobility, decreasing employee loyalty and unceasing corporate raiding of key employees, businesses must protect their "information age" assets, i.e., intellectual property, new technologies, customer lists and other confidential information.

However, patent, copyright and trade-secret laws may leave crucial business assets -- such as business know-how and customer relationships -- unprotected. Employees carry these intangible assets in their heads. If the employees leave, the assets go with them. Noncompetition agreements can fill this gap.

Yet these agreements also create a tension among competing legal rights and public policies. On the one hand, contractual promises should be enforced and businesses should be allowed to trust employees with important information or opportunities without risking their loss when a competitor lures an employee away. On the other hand, public policy and the law favor competition, disfavor restraints of trade and recognize a person"s right to work in a chosen field and location.

A few states, California and Colorado among them, resolve this tension by generally refusing to enforce non-competition agreements. However, most states, including Missouri and Kansas, typically uphold noncompetition agreements if they do not restrict the departing employee more than reasonably necessary to protect the former employer"s interest in retaining its customers and protecting its proprietary business information.

But what is a "reasonably necessary" restriction? And how do you determine which legal right -- the employer"s, the employee's or the public's -- should take precedence? These are the questions the courts must answer when faced with a noncompetition agreement, and the results naturally vary with the facts of each case. 

Thus, a noncompetition agreement may be declared invalid when applied in one industry because it lasts two years and extends 45 miles, but may be enforced nationwide in another industry for three years. One court may declare that it is not in the "public interest" to preclude competition among accountants in a mid-sized community, yet another court may enforce a noncompete agreement that precludes a doctor from moving to a small, rural community without local medical services. 

In our increasingly competitive and ever more mobile and technologically changing world, we are sure to see more noncompetition agreements in the business world, and, accordingly, more frequent challenges to their validity.