As a business owner, a non-compete agreement is a powerful tool that protects your intellectual property, client relationships, and trade secrets, allowing you to maintain a competitive edge over other companies in your industry. Also known as a “covenant not to compete,” a non-compete agreement prevents employees from working for a competitor, sharing proprietary information, or starting a competing business for a period of time that is specified in the contract. There are a number of elements that must be present in order for a non-compete agreement to be legally binding. If you have questions or concerns about non-compete agreements, and the legal implications, and why they are important to your business, do not hesitate to contact an experienced business lawyer.
What Is a Non-Compete Agreement?
A “non-compete agreement” is a legal contract between an employer and an employee that restricts employees from working for a direct competitor or starting a competing business for a certain period of time after leaving their current job. The purpose of a non-compete agreement is to protect trade secrets, sensitive business information, and other confidential information. While some states no longer enforce non-compete agreements, and others have salary thresholds, Pennsylvania enforces non-compete agreements, provided they meet the legal standards. The following are key elements that make a non-compete agreement legally binding:
- Reasonable graphic scope. The geographic area covered by the non-compete agreement must be reasonable in relation to the business interests that are being protected in the contract. It should be limited to the areas where there is legitimate competition. If a non-compete agreement covers an entire country, this may be unenforceable if it is considered too broad. For example, if your company only operates in one city, a non-compete agreement that includes the entire state may not hold up in court.
- Valid business interest. Employers must demonstrate why it is necessary to protect their interests from unfair competition. This may include protecting trade secrets, safeguarding proprietary information, maintaining customer relationships, or a combination of the three. A non-compete agreement may be deemed unnecessary if there is no significant business interest at risk.
- Reasonable duration. The length of time that a non-compete agreement lasts generally depends on the industry, although agreements that last for six months to two years are more likely to be upheld. If a restriction is too long, it may be considered excessive, unreasonable, and unenforceable.
- Scope of restricted activity. This specifies that types of positions, activities, and industries employees are prohibited from pursuing after leaving the company. For example, if you operate a software company, a non-compete agreement may prevent employees from working for a competitor developing similar software. However, if the agreement is too broad, and prevents employees from pursuing any job in software, this would likely be considered too broad, and unenforceable.
- Adequate consideration. In order for a non-compete agreement to be valid, the agreement should include a job offer, promotions, bonuses, or other benefits that the employee would receive in exchange for agreeing to the terms. For new employees, an employment offer serves as consideration. For existing employees, you would need to provide additional perks to make the non-compete agreement legally binding. This could include a bonus, salary increase, or other financial incentives.
- Clear and understandable language. The non-compete agreement should use language that is clear, specific, and direct. If overly complex verbiage is used, this can create confusion and undermine the enforceability of the contract.
- Enforcement and consequences of breach. This provides an overview of how you will enforce the terms of the agreement and what the penalties are if an employee violates the terms. While you should be prepared to enforce the terms of the agreement, the consequences should not be excessively punitive.
What Are the Pros and Cons of Non-Compete Agreements?
While non-compete agreements protect a company’s proprietary information, allowing the organization to maintain a competitive edge in the industry, there are benefits and disadvantages that employees and employers alike should consider, including the following:
Pros of a Non-Compete Agreement:
- Protects business interests. When employees leave the company, having a non-compete agreement in place ensures that they do not take trade secrets, confidential clients list, and other valuable knowledge about the company with them and use the information in their new position.
- Fosters loyalty. If employees are contractually restricted from leaving the company to work for a competitor, or start their own business that is a direct competitor of the company, employers are more likely to invest in programs like skills development, training programs, and high-profile projects that encourage employees to remain loyal to the company.
- Prevents unfair competition. Non-compete agreements prohibit employees from using proprietary information against the company if they leave the company to work for a direct competitor. This is particularly important when companies rely on trade secrets, ground-breaking research, and customer relationships to maintain a competitive edge in the field.
Cons of a Non-Compete Agreement:
- Prevents employee mobility. Employees may find that non-compete agreements will make it difficult to seek employment in the same industry if they leave their job if the agreement states that they cannot work for a competitor or start their own business for a specified period of time.
- Enforcement challenges. Non-compete agreements that are too broad, too restrictive, or include other unreasonable terms may lead to time-consuming legal battles and uncertainty for the employee and the employer. If the terms of the agreement are unreasonable, the agreement may not be enforceable.
- Difficulty in attracting top talent. If highly qualified employees avoid companies that require non-compete clauses due to the restrictive nature of the agreement, this can make it difficult for employers to attract the best candidates if they prefer to work for a company that offers greater flexibility.
What Should Employers Consider When Drafting Non-Compete Agreements?
The Pennsylvania Supreme Court found that non-compete agreements are viewed as a trade restraint that makes it difficult for a former employee to seek employment and earn a living. As a result, they are closely scrutinized by the court to determine whether an unreasonable burden is placed on the former employee. Even if the agreement is enforced, the court may limit the restrictions if they are considered broader than necessary to protect the employer’s interests. The following are principles that are part of Pennsylvania case law that determine whether a non-compete agreement is enforceable:
- Protection of a legitimate business interest. Employers must have a legitimate business interest that it is seeking to protect. They may not enforce a non-compete agreement simply to eliminate competition.
- Consideration for signing the agreement. The employee must receive something in exchange for signing the non-compete agreement. This may include a salary increase, a lump sum payment, or some other material compensation for agreeing to sign the agreement.
- Termination of employment or voluntary departure. This is another important factor when determining whether a non-compete agreement is enforceable. If the employee is terminated without cause, and the employer deems the employee to be of little to no value to the company, the court may find that the non-compete agreement is not enforceable since the threat posed by the former employee is presumably insignificant.
- Assignment to a new employer. The non-compete agreement is confined to the employer with whom the agreement was made, and cannot be transferred to a new employer unless the agreement contains specific language that allows the new employer to permit it.
- Non-compete agreements incident to the sale of a business. When companies are entering into agreements for the sale of a business, the courts generally recognize that the parties involved possess equal bargaining power, and non-compete agreements are treated differently. Under these circumstances, they are more likely to be enforceable.
In order to ensure that a non-compete agreement is aligned with the current legal standards and is enforceable under Pennsylvania law, employers should consider the following steps:
- Review existing non-compete agreements to ensure that they meet the legal standards and make any revisions necessary to make sure that those standards are met.
- Consider using other types of restrictive covenants, including Non-Disclosure Agreements (NDAs), and non-solicitation agreements, rather than relying solely on non-compete agreements. These alternatives are generally considered less restrictive and more likely to be enforced.
- Stay informed about changes in state and federal legal developments that impact non-compete agreements that may require adjustments to your employment practices.
Our Philadelphia Business Lawyers at The Gold Law Firm P.C. Assist Clients With Non-Compete Agreements
If you have questions about non-compete agreements, or require legal assistance drafting legal documents that protect your company’s proprietary information, do not hesitate to contact our Philadelphia business lawyers at The Gold Law Firm P.C. We will evaluate the terms of the agreement and ensure that the non-compete agreement meets the legal requirements necessary to enforce the contract. To schedule a free consultation, call today at 215-569-1999 or contact us online. With office locations in Philadelphia, Pennsylvania and Pennsauken, New Jersey, we proudly serve clients in the surrounding areas.
