October, 2005

Covenants Not To Compete

Some jobs require that you to sign an employment contract before you start.  Most of those contracts will contain a Covenant Not To Compete (CNTC) clause.  This clause says you promise not to compete with the employer for a period of time and/or within a particular geographic area should your job terminate.  For example, if you just left your job as a computer programmer for Boston Computers, Inc., you may have to refrain from working in computers for 5 years anywhere in the New England area. 

These restrictions are not very popular with the Courts because they interfere with free competition and hamper the right of the employee to earn a living.   Therefore, in order to be enforceable, the CNTC must be necessary to protect the employer’s trade secrets or good will.

a.Trade Secrets include any valuable information that gives you an advantage over your competitor. Knowing what was in McDonald’s “Special Sauce” is a trade secret.  Therefore, they do not want the Special Sauce Mixer to leave and take a job with Burger King.  The more valuable the information, the more likely the agreement is to be enforced by the courts.  Knowing the rest of the ingredients in a Big Mac is less valuable and therefore less likely to be enforced.

b.Good Will is the company’s reputation in the community, or it’s relationship with its customers.  The best example of messing with a good will relationship is when a salesperson jumps ship and tries to bring his former customers/clients with him. 

To also be enforceable, CNTCs must be reasonable in time and geographic area.  To say you can never do something again is too much.  Generally it will not extend beyond 10 years.  And to say you cannot do it anywhere in the world is also probably going too far.  The restriction should only be as wide as is necessary to protect the former employer’s trade.  Generally, covenants will be enforced in the geographic area previously served by the employee, but may be expanded when necessary.

And when do CNTCs go right out the window?  When you are fired without adequate cause, laid off, or when the employer otherwise breaks the employment contract.  None of that is your fault and the courts are not going to preclude you from work in these situations.

One final tip.  The CNTC is also void when you are forced to sign it in order to keep your job after your employment began.  If they didn’t get you to sign it when they hired you, they can’t give it to you later unless they give you some other consideration for signing it (like a promotion or big raise).