Questions Regarding Non-Competition Covenants

An employment contract documents the agreements between an employer and his employee. When it comes to employment contracts, non-competition covenants or agreements are usually included.

What are non-competition covenants?

Non-competition agreements or covenants states that when an employee leaves his employer, he promises not to compete against the company for a specific time by working for a different company with the same industry, by starting his own business with the same nature, or by any other possible means.

These agreements are often part of a basic employment contract given at the beginning of the employment term, or it may also be included through a separate document (known as non-compete clause or covenant not to compete). It takes effect, naturally, once the employee leaves the former employer.

Legal requirements for non-competition agreements:

• It should be supported by consideration at the time signed.
• It protects a legitimate business interest.
• It should be reasonable in scope, geography, and time.

There also are principles that should be present in every non-competition agreement:

• “Blue Pencil Rule”
• Distance
• Duration
• Independent Consideration
• Liability for New Employers
• Reasonableness

What are the “legitimate business interests?”

Throughout the employment, the employee acquires skills necessary and information regarding his employer. In the event of dismissal or resignation, the employer may prevent the employee from taking advantage of what he knows. Customers list, processes, technologies, trade secrets, upcoming products, marketing plans, and business practices are some of the things that the employee cannot use or disclose after leaving the company.

What if the contract restricts the employee too much?

While it does restrict a lot of things, non-competition covenant shouldn’t weigh down an employee’s right to earn a living. The covenant is probably too broad and if brought to court, needs to be scrutinized closely. A contract is only legally binding if the agreement contains “reasonable limitations” regarding the geographical area and time period in which the employee may not compete.

The extent of non-compete clauses varies per jurisdiction. In Ohio, courts may redraw the agreement if they are too broad or unlawful. The employer should prove that the agreement protects a legitimate business interest.

A non-competition agreement may sound unfair to some, but in order to not be restricted by such provision, the employment contract should be read very well before being signed.


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