Covenant not to compete

Question 1

Covenant not to compete

Answer 1

A covenant not to compete is an employment agreement is not viewed favorably in modern law.

For an employer to enforce a covenant not to compete against a former employee, the covenant must be (i) in writing, (ii) reasonable as to time and territory, (iii) made a part of the employment contract, (iv) based on valuable consideration, and (v) designed to protect a legitimate business interest of the employer.

Question 2

Reasonable as to time and territory

Answer 2

The employer, as the party seeking to enforce the covenant not to compete, bears the burden of establishing the reasonableness of the time and territory restrictions.

While a five-year period has been upheld when the restricted territory was limited to one city, this lengthy time period is only reasonable under “extreme conditions.”

The employer must show that the territory embraced by the covenant is no greater than necessary to secure the protection of the employer’s business.

In determining whether the territorial restrictions imposed by a covenant not to compete are reasonable, courts consider (i) the area or scope of the restriction, (ii) the area assigned to the employee, (iii) the area where the employee actually worked or was subject to work, (iv) the area in which the employer operated, (v) the nature of the business, and (vi) the nature of the employee’s duties and the employee’s knowledge of the employer’s business operation.

When the employer’s concern arises from the former employee’s knowledge of the employer’s customers, the geographic scope of the covenant should be limited to areas in which the former employee made contacts during the period of his employment.

Question 3

Part of the employment contract

Answer 3

Mere employment does not subject an employee to a covenant not to compete upon termination of the employment

Question 4

Consideration

Answer 4

With regard to a prospective employee, the employer can condition its offer of employment on the employee’s agreement to a covenant not to compete.

With regard to a current employee, the mere continuation of employment is not sufficient to constitute consideration for a covenant not to compete

Question 5

Legitimate business interest

Answer 5

A restriction against working for a competitor in the same or similar capacity as that in which the former employee worked for the employer may be reasonable. By contrast, a general restriction against working for a competitor is usually overly broad and unenforceable.