Enforceability of a non-compete agreement: a comparison between various states

The matter of enforceability of non-compete agreements, or non-compete covenants – i.e. those covenants requiring an employee (often equipped with knowledge and information that is potentially dangerous if disclosed to competitors) not to work for competitors after the end of the employment relationship – may be treated differently by different states in the U.S., and it should be kept in mind that case law on the topic is constantly evolving.

In a recent decision the Illinois Court of Appeals1 held the non-solicitation and non-competition provisions of an employment agreement to be unenforceable, due to lack of consideration. The Illinois Court of Appeals established that a promise of an employment “at will” cannot be considered as adequate consideration to ensure the validity of a non-compete covenant, referring to previous decisions stating that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant.

In general, a restrictive covenant to be valid and enforceable in Illinois must be (a) reasonable, (b) ancillary to a valid contract, and (c) supported by adequate consideration. Adequate consideration can consist of a bonus , stock options, or, in view of this decision, a continued employment of at least two years.

Non-competition agreements generally contain three types of restrictions:

(a) those restrictions preventing a former employee from working for a competitor,

(b) those restrictions preventing a former employee from soliciting former colleagues to work for the new employer, and/or

(c) those restrictions preventing a former employee from using confidential information to compete with the former employer. Additionally, the use of confidential information may be addressed by a confidentiality agreement signed by the employee, or by the implementation by the various states of the Uniform Trade Secrets Act (“UTSA”).

However, different states have developed different case law in relation to the enforceability of non-compete covenants. As non-compete covenants are still viewed as a restriction to the principle of “free trade”, most States will void those covenants that unreasonably limit the individual’s ability to conduct a business.

The State of California, traditionally more lenient toward employees, does not enforce non-compete agreements. Some view California’s stance on non-compete agreements as a contributing factor to the high mobility of its high-skilled workforce, ultimately fostering the wealth and growth of the hi-tech sector in Silicon Valley. Although a non-competition agreement is generally considered unenforceable in California (and an employment agreement cannot be terminated based on an employee refusing to sign one), a solution to protect a company against the possibility that the former employee will solicit customers of the former employer might be – in those circumstances in which a customer list can be considered as a trade secret – to prevent it on the grounds that this may constitute a violation of trade secrets. Interestingly, in California it is very difficult enforce a non-compete agreement governed by some other state’s law.

The State of New York has a much softer attitude, in the sense that restrictive covenants can be enforced, but – as they are still viewed as an obstacle to free trade, they are allowed under certain conditions. Restrictive covenants must be (a) reasonable, and (b) allow the former employee to sustain itself.

In Texas, non-competition agreements are governed by Texas Business and Commerce Code (“TBCC”), which provides for the validity of agreements containing ” … reasonable limitations with reference to the geographical extension , duration and purpose of the activity that it is limited and only if they are connected and placed under a valid contract.” A series of Supreme Court decisions since 2006 clarified and expanded the provisions of TBCC, so that stock option agreements inventories provided as part of the employee compensation were validly correlated to the interest of a company to protect itself.

A summary chart of how non-competition covenants are treated in some states can be found here.

Notes

  1. Fifield et al. v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, downloadable here