The Enforceable Elements of Non-Competition Agreements
Non-competition agreements, also known as covenants not to compete or simply “non-competes”, are becoming increasingly popular and important in today’s competitive business environment. Employers rely on these agreements to prevent employees who have acquired knowledge of confidential or sensitive business information during their employment from leaving the company and directly competing with the business. Ultimately however, a non-competition agreement is meaningless if it’s not enforceable.
This blog post explores general provisions that should be considered in non-competition agreements and how they will be reviewed by Colorado courts. As non-competition clauses are subject to state law, it is important to consider the public policy related to non-competes in your state. Generally speaking, Colorado strongly disfavors non-competition agreements outside certain contexts. The idea is to balance an employee’s need to earn a living with the effects non-competes can have on business expansion and state commerce. For this reason, Colorado’s statute declares that all non-competition agreements are void unless they fit one of four exceptions. Subsequent blog posts will discuss what the statutory exceptions are and how they operate.
Some of the key elements of well-drafted non-competition agreements are the following:
- Consideration: like all contracts, non-competes must be supported by adequate and mutual consideration. This takes into account when in the employment process an employee signs the non-compete agreement and what the employee received in return.
- Access to Vital Information: what vital information of the business does/did the employee actually have access too? Examples: customer and client lists, intellectual property, business strategies, etc.
- Enforceability: will the agreement be enforceable if the employee is laid off? Leaves on good terms? Fired for cause?
- Nature and Scope: what types of competition are prohibited? These prohibitions should be carefully delineated. The protection the employer wants must be weighed against the burden of proving the reasonableness of such prohibitions.
- Time Period: how long should the employee be prohibited from certain activities? How long is really necessary? How long is actually reasonable?
- Geographic Scope: how broad an area will be considered reasonable? Most courts limit this to the geographic location covered by the business.
- Remedies: what remedies does the company want against the employee for a breach of the non-compete? What remedies are reasonable?
- Injunctive Relief: this is the right to restrain/prevent the employee from doing certain activities. Should this be included?
- Costs: if the employee breaches, should they be responsible for paying the employer’s attorney fees?
- Non-disclosure: this provision is often forgotten. This provision can prohibit the employee from disclosing any of your company’s proprietary or confidential information to third parties. The more explicitly this provision is drafted, the more likelihood your information will be protected. Courts also tend to favor non-disclosure provisions, even when courts do not approve of the non-competition clause.
It is becoming increasingly rare for employees to remain with one company for their entire career. Industry is starting to realize this and increasingly use non-competes to protect their business interests. Nearly every provision of a non-compete will be analyzed for its reasonableness. The agreement’s terms must be carefully considered and drafted. The more general the terms, the more difficult the burden will be on the employer to prove that such terms are actually reasonable considering the limitations it places on the employee. Each of these elements should be carefully considered on a case-by-case basis. Form agreements are a recipe for disaster. Care must be taken to make sure that the agreement will be enforceable. If the agreement is ultimately found not to be enforceable, the business may lose more than money; it may lose its ability to effectively compete in the market place.
Mallon & Lonnquist, LLC, is a business, employment, real estate, and litigation law firm. Craig T. Watrous is a Colorado business attorney with Mallon & Lonnquist, based in Denver, Colorado. Craig regularly represents clients on both sides of covenants not to compete. Craig can be reached at email@example.com.