Non-Compete and Non-Solicitation Agreements – What are the Enforceability Limits?
The courts have long held that businesses have a legitimate interest in protecting critical assets, including non-public ways in which they conduct business and valuable customer and client lists. Similarly, courts have also held that employees have a legitimate interest in not having their employment opportunities eliminated through prohibitive agreements that may be required by employers.
What, then, is the outcome when an employer attempts to enforce a non-compete or non-solicitation agreement?
The Key Factors Considered by Courts
Non-compete agreements prohibit employees from working for competitors, and non-solicitation agreements prevent an employee from soliciting customers of a business after the employee leaves the business. Often, these “covenants” are part of one agreement.
When considering whether these agreements/covenants are enforceable, courts often consider the following factors:
- Nature of Non-Solicitation Covenant. Companies may have a protectable interest in preventing a former employee from soliciting current company clients, but will likely have less of a protectable interest in the former employee from soliciting prospective clients whom the business may have contacted, but whom are not yet clients. Indiana courts will likely find that a business will have no protectable interest in potential clients whom the business has not even contacted. Additionally, the court may refuse to uphold a non-solicitation covenant if the employee had no contact with the potential clients who may later be solicited.
- Geographic Scope of Protection. Courts will be unlikely to enforce a covenant that goes beyond the reasonable geographic scope of protection necessary based upon the company’s business operations. The business of some companies – such as a laundry service – may be very limited geographically, as all customers may be located within a radius of only several miles. The customers of other companies may all be within a city or county. The courts will want to consider the geographic area in which the business reasonably needs protection, and if the geographic area in the agreement goes beyond such limits, it will likely be unenforceable.
- What Conduct or Work are Prohibited? Businesses may have a protectable interest in seeing that an employee does not work for a competitor in substantially the same position, but they have less of a legitimate interest if the employee is to work in an entirely different position.
- Time limits for Non-Compete Covenants. Over time, the protectable interests of many companies may decrease. The company may sell different products using different methods and have a different client base following the separation of an employee’s employment with the business. The courts thus may consider whether a time period is overly-broad. A time limit of a couple of years may be found acceptable to prevent an employee from working for a competitor; a lifetime prohibition may be too long.
- Will the Agreement Prohibit the Employee from Engaging in the Employee’s Profession? As an example, a law firm cannot prohibit an associate attorney from practicing law after the employee leaves the firm, as such agreement would be unduly restrictive on the associate attorney. Courts thus are naturally reluctant to uphold agreements that would result in employees not being able to practice their profession or take away their livelihood.
How We Help
It’s critical that non-compete and non-solicitation agreements be drafted carefully if they are to be upheld. We are available to represent businesses in drafting non-compete and non-solicitation agreements to protect their legitimate interests, and employees who may be concerned that an agreement requested by a business may unduly restrict their future employment opportunities.
