WARNING: Non-Competition Agreements & the Entrepreneur

There are many challenges that an entrepreneur may face—raising capital, sustaining the business, hiring effective employees—the list goes on and on.  And although you may be focused solely on your business, your sales, your employees, your success, as a result, you may lose sight of another important aspect: the competition.

As an entrepreneur, it’s important for you to understand the notion of non-competition agreements.  Believe it or not, this may be the one thing that is standing in between you and your small business.  If you have signed a non-competition agreement (often referred to as a “non-compete”) with a former employer, you may find a few roadblocks on the way to self-employment.

Non-competes are often signed at the beginning of a term of employment and kick in at the end of the employer/employee relationship.  They are for the protection of the employer’s trade secrets, business plans, marketing strategies, customer lists, etc.  Most non-competes specify a specific time and geographic area that the former employee is to refrain from engaging in activities that will place him or her in direct competition with the former employer.

Generally speaking, in states where non-competes are legal, they will be enforceable if, at a minimum, they are:

1)     Designed to protect the former employer’s legitimate business interests;

2)    Limited both in duration and in geographical area; and

3)    Not contrary to the public interest.

Courts generally disapprove of non-competes that are so broad that they unfairly impede a former employee’s right to earn a living.  If a court finds a non-compete overbroad, it may narrow the duration and/or scope of the agreement or refuse to enforce it all together.

So if think you may be covered by a non-compete, here are a few things to think about:

1)    Non-competes must be reasonable in duration.  Generally, the time frame ranges from one to two years, but may be as high as five.  If the former employer’s restriction prevents you from doing business for an excessive amount of time, it is probably too broad. 

2)   The geographical area covered by the non-compete must also be reasonable.  Generally, courts will not allow a non-compete to prevent you from working in a geographic area where the former employer does not do business.

3)   Even if you think your non-compete is overbroad or unreasonable, seek out some legal guidance first to discuss your rights and risks.

Enforceable non-competes are about the balancing of interests.  Employers have a legitimate right to protect their customer relationships and confidential information, but former employees also have a right to earn a living in their chosen endeavor.  If you have questions about your non-compete, consult a business attorney.

With all of the challenges of launching a startup, it is easy to miss something like non-competes.  Don’t let this important factor sidetrack you from Thinking Big!

 

Written by: Donald R. Simon, J.D./LL.M., is president and CEO of Simon Business Consulting, Inc., a firm providing consulting services such as business and marketing plan development, incorporations, intellectual property advising, franchising regulatory assistance, and presentations on the basics of starting a small business.  Send questions or comments to don@simonbizconsulting.com.  This blog is provided as a source of information and is not to be construed as legal advice or opinion, or to form an attorney-client relationship.  For legal advice, please consult an attorney.

Edited by: Allison Way.