"Famous Last Words"

Are Non-competes Enforceable? (December 2005)

Dear Jim:

So, the company that I used to work for is threatening to use a non-compete agreement in my contract to prevent me from taking a position in the area that I currently live. The contract basically said that I would be barred from taking any position at a competing company within 50 miles of the first company for 2 years.

I have a very exciting offer that, unfortunately, happens to fall within that 50-mile radius. I've spoken to a couple of friends of mine who are lawyers and they have suggested that I consult a local lawyer who might be able to give me better advice.

Do you have any other advice or suggestions?

Sincerely,

Dear Wanting:

The advice to consult a local lawyer is good.

Enforceability of non-compete language is pretty much determined on a state-by-state basis.

In California, which may have the most pro-employee policy of any state, non-compete clauses are not enforceable under the law as a matter of public policy; except in very narrow circumstances.

In California, in order to prevent someone from going to work for a competitor, even a direct competitor in the exact same business, physically located down the hall or across the street (literally), a person must be an owner or partner in a business who has sold his or her interest and as part of the sale, agreed to some sort of non-compete.

An example of this restriction would be the sale of a dry cleaning business by the owner who turns around and opens a competing cleaner across the street. If there is a non-compete in the sale agreement, the seller would be precluded from opening the new shop within the agreed upon geographic area for the term of the restriction.

California believes that every person has the right to earn a living in his or her chosen field. That right should not be denied as an issue of contract.

The law in other states may vary. However, as a general principal, restrictions found in employment agreements must pass a “reasonableness” test. Lawyers have a technical term for this – it's called the “smell test.”

A restriction that prohibits re-employment in your field for a period of 100 years would be obviously unreasonable. A restriction against taking a job for 90 days within 25 miles might be acceptable.

In determining what is reasonable, courts may look at the purpose of the restriction. A short period of non-competition, like 90 days to six months, may help to protect against “poaching” of employees. If the original employer has made a significant investment in training, this may be an interest that a reasonable non-compete tries to protect. In your situation, on the surface, a two year restriction could be regarded as excessive.

One factor that does not go into any analysis of reasonableness of a non-complete clause is the ex-employee's access to the confidential information of the previous employer.

When you do start your new job, once the issues of enforceability or reasonableness of the non-complete have been settled, there will be a continuing obligation to the previous employer not to use or disclose its confidential or proprietary information. That obligation continues no matter what your employment situation.

Speaking to a local lawyer who represents clients in employment matters can help you to understand the enforceability of non-compete restrictions in your state. Your new employer may have an employment lawyer on staff who can assist you.

If the new company wants you to start, it should be able to help you analyze the situation, make a determination of whether the restriction is reasonable and/or enforceable, and may even be willing to stand with you if your previous employer attempts to enforce the language.

In the end, while your previous employer may threaten, it may back off and decide not to pursue any action against you. After all, if it decides to go after you, and a court determines the restriction in the employment agreement is not reasonable or otherwise unenforceable, then all similar clauses may become unenforceable. Your previous employer may not want to find itself in that position.

One final caution. Consulting with your new employer's lawyer may help you understand your situation, but he or she is representing the employer and not you. If you get assurances that you are on solid ground to ignore the non-compete, ask whether the new company would provide a defense should your previous employer takes steps to enforce its non-compete. The videogame business is very competitive and talent is a valuable resource. They may surprise you. If the new employer says yes, get it in writing.