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Home | Non-Compete Clauses and their Enforceability

One of the most exciting aspects of being an entrepreneur is taking an idea and transforming it into a successful, thriving enterprise.  Unfortunately, sometimes in their haste and excitement to develop and monetize the idea, entrepreneurs may overlook necessary steps to protect their own creation.
Prudent Business owners often seek to protect their products, services, secrets, clients or techniques from being used by their competitors, or even worse, one of their own partners or employees who decides to leave the business.  As such, a business owner may enter into a non-competition or non-solicitation agreements with their partners or employees to restrict the ability of the partner or employee from directly competing with the business and/or taking clients away from the business when they decide to leave.
The degree to which a non-compete or non-solicitation agreement would be enforced by a court against a departing employee or partner varies depending on which state’s laws will be used to interpret the agreement.  However, the general rule derived from English Common Law was to hold these types of agreements unenforceable as an unreasonable restraint on trade since the presumption is that everyone has a right to make a living.
However, courts are more likely to uphold and enforce a non-competition agreement if it is limited in time and scope to what is necessary to protect the legitimate interests of the business.  On the one hand, if the agreement is overly broad in time or scope, for example, an employment agreement which provides that upon leaving the Company, Joe Employee agrees not to engage in any similar lines of work anywhere in the state for a period of ten (10) years would likely be unenforceable in many states as an unreasonable restraint on a person’s right to make a living.   On the other hand, if a business has developed a confidential client list over a period of time which it identifies as its intellectual property, courts may very well enforce an agreement that prohibits a departing employee from using information from that confidential client list.
Drafting a non-competition agreement that will likely pass muster with the court will require an analysis of how such agreements are viewed in the particular state(s) where business is conducted as well whether the agreement truly serves a legitimate business purposes and is narrowly tailored to serve those ends, or whether it unduly restrict an individual’s right to earn a living.  Nevertheless, if your business utilizes any information or asset which it wishes to protect, having the right agreement in writing is a must!
If you have questions regarding  non-solicitation or non-compete agreements or would like assistance with preparing such agreements, please contact one of the attorneys of KKOS and we can advise you on strategies to protect your valuable business.
Lee Chen is an associate attorney at the Irvine, California office of Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”) and helps clients daily around the country with common contract issues relating to their businesses, investments, and real estate. He can be reached at [email protected] or by phone at (888) 801-0010.

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