The "Who, what, when, where, and why" of non-compete agreements

By Sally L. Galati, Esq.

Non-compete agreements are becoming more common in today’s employment market. If you haven’t been subject to a non-compete agreement (NCA) in your employment, then maybe you’ve required a NCA from your employees; at the least, you’ve probably heard stories about these agreements from friends or family. But regardless of which side of the signature block you may sign, it is important to understand the purpose of the NCA and to recognize the likelihood of being able to enforce this type of agreement before any pen is put to paper.

In understanding NCAs, it is helpful to first consider these agreements from a court’s perspective. Courts generally disfavor NCAs, primarily because they impose restrictions on an employee’s ability to work freely. As a result, a NCA can be difficult to enforce if it is not drafted carefully for a specific business.

A brief explanation of the five “W’s” (and one “H”) will help lay the groundwork for a NCA that is likely enforceable.

Who: One size does not fit all, and not every employee should be covered by a non-compete agreement. Only an employee whose departure from the company poses a competitive threat to a company’s business should be considered as a candidate for such an agreement. If every employee in the company is required to sign a NCA, the employer runs the risk that a court would minimize the value of the non-compete because the agreement was not executed selectively, but rather as a matter of course. Therefore, non-compete agreements should only be signed by employees who possess valuable information about the business, including trade secrets and other confidential information acquired while in employment. In the real estate profession, consider sales and service employees who work closely with customers that are vital to the business, and any employees who have enough information about the business to be in a position to start a similar business that would then operate in competition with the business.

What: A non-compete agreement is a contract limiting, in advance, an employee’s ability to compete with his employer after the end of the employer/employee relationship. The agreement generally limits the type of work an employee can do (either individually or as an employee of a competitor) during a specified period of time and within a specified geographic area. As with any other contract, there must be consideration exchanged by the parties for the agreement to be valid.
In Nevada, NCAs are permitted “if the agreement is supported by valuable consideration and is otherwise reasonable in its scope and duration.” NRS 613.200 (2007). There are no fool-proof guidelines as to which duration and geographic restrictions are acceptable to the courts. Reasonableness is the key—the goal of a NCA is to protect the employer’s business interests, not to prohibit the employee from engaging in his profession!

When: NCAs are generally executed as a condition of employment at the time an employee accepts employment with a business. However, NCAs can be executed at any time during the employment relationship, as long as sufficient consideration is exchanged. In the case of a new employee accepting a job, the employer’s promise of the job in exchange for the employee’s promise not to compete would likely be sufficient consideration. When an existing employee executes a NCA, however, sufficient consideration could include either a raise or a promotion, or even a one-time bonus payment in exchange for the NCA. Without consideration of some sort, the agreement will be invalid and unenforceable.

Where: NCAs are often a part of a more comprehensive employment agreement. Such employment agreements usually also contain, among other things, a non-solicitation clause, a confidentiality clause, and a non-disclosure clause. For a key employee of a business, it generally makes sound business sense to invest in a well-crafted employment agreement to address all the business concerns at one time early in the employer/employee relationship. That way, both parties are aware of the requirements and restrictions and can make reasoned decisions regarding the employment opportunity at the time when the decision carries the least risk.

Why: It is worth repeating that the purpose of a NCA is to protect the employer’s legitimate business interests! If the agreement unreasonably restricts an employee’s ability to earn a living, either because it is of too long a duration, or it encompasses too much restricted territory, or because it is so broad that the employee is unable to work in his profession, it will likely be unenforceable.

How: An enforceable NCA will reflect a balance between protecting the legitimate interests of a business with an employee’s right to work, while complying with Nevada law. An enforceable NCA will be reasonable in the amount of time restricted, the geographic scope of the restriction, and specific in detailing the type of business interest being protected (i.e., a restriction that prevents an employee from working for a competing real estate business without specifying “in the capacity of a real estate agent” would prevent the employee from working for that competitor even as a receptionist—and is probably unenforceable). Your business interests stand a much better chance of being protected with a reasonable NCA than by demanding a heavily employer-favorable NCA. Employers should be aware that there are Internet resources available that provide assistance to employees in breaking NCAs with their employers. In most cases, it appears these sites recommend poking holes in NCAs by finding provisions that cross the boundary into unreasonableness.

While there is no standard form that ensures enforceability of a non-compete agreement, consideration of the “who, what, when, where, why, and how” principles above prior to the drafting of such an agreement affords a much better chance of acceptability, both to the employee and to the courts.