Is Your Non-Compete Clause Enforceable?

Non-compete clauses (NCCs) can be an excellent method for protecting a business’ financial interests when hiring an employee with access to valuable information. The protection they offer a company does no good, however, when they’re struck down as unenforceable by a court.

How do you know if your NCC is enforceable? FindLaw’s page on NCCs provides a helpful overview. But there are some more tips that Philadelphia-area employers will want to keep in mind.

Non-Compete Clauses and the Law

When implemented in contracts for new hires, NCCs:

• Protect a legitimate business interest by the employer; and
• Are reasonable in scope, geography, and time.

NCCs which are overly broad and unreasonably punish employees by not allowing them to earn a living after leaving a business are generally unenforceable.

There are no specific statutes in New Jersey, Pennsylvania, and Delaware governing the use of NCCs, but case law in these states focuses on the following:

• In New Jersey, NCCs need to be based on a legitimate business reason and must be reasonable under the circumstances.
• In Pennsylvania, NCCs are judged case-by-case on the reasonableness of their restrictions and the circumstances of the employee’s termination.
• In Delaware, NCCs cannot be overly broad and must be necessary to protect a business’ interests.

3 Common Reasons a NCC May Be Unenforceable

So for what reasons might a non-compete clause be held unenforceable? Here are three possibilities:

1. Lack of consideration.A NCC is an agreement governed by contract principles and, like all enforceable contracts, must be supported by consideration. Typically, consideration is satisfied by the employee being hired by the company. But if a NCC is offered to an existing employee, there must generally be an additional benefit offered, or else the clause may be unenforceable.
2. Unreasonably broad.It is not reasonable in protecting a business’ interests to prevent a former employee from working anywhere in an entire field, and preventing honest competition is not a legitimate business interest. Courts will strike down an overly broad provision that can’t be justified.
3. Scope not narrow enough.There is no exact formula for how many years and how many miles make up an enforceable scope for a NCC. However, the courts generally prefer a scope that is tailored to the circumstances of the business and that aligns with a reasonable business interest.

Next Steps

With this information in mind, is your NCC enforceable? If you’re not sure, one option is to hire an experienced contracts lawyer to review the language in your work contracts.

Another, and perhaps more affordable, option is to sign up for a prepaid legal plan with a service like LegalStreet. A LegalStreet plan includes access to on-call lawyers, free contract reviews (up to 10 pages), and a discount if you need to hire counsel.

NCCs can be confusing, but they can also be very important for many businesses. Make sure your NCC is enforceable before your employees sign on the dotted line.

Disclosure: LegalStreet and FindLaw.com are owned by the same company.

Related Resources:

• Creating an Enforceable Noncompete Agreement (FindLaw)
• 3 Things to Know About Employee Contracts (FindLaw’s Free Enterprise)
• Creating successful non-compete agreements (FindLaw’s KnowledgeBase)
• From one job to the next: the non-compete agreement problem (FindLaw’s KnowledgeBase)

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