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Covenants Not To Compete
This information was graciously provided by Colleen A. Zak, Esquire of Reed Smith Shaw & McClay LLP, who isn't responsible for anything you do with it (see our disclaimer).
As part of your negotiations, a prospective employer may request that you sign a Covenant Not To Compete (also called a Non-Compete Agreement).
A Covenant Not To Compete is a promise by an employee that he or she will not compete with the employer during or after employment, either by starting a competitive business or by working for the employer's competitors.
A Covenant Not To Compete is appropriate if it protects the employer’s legitimate interests: protecting business information, goodwill of customers, trade secrets and other such information. Attempting to prevent an employee from resigning is not legitimate.
Non-compete agreements are legal in Pennsylvania, but are not favored by the courts. This simply means that a court will scrutinize a Covenant Not To Compete to make sure that it is "reasonable."
- A Covenant Not To Compete is reasonable where it imposes only those limitations that are necessary to protect the employer’s legitimate business interests, as described above.
- A Covenant Not To Compete must be reasonable in its geographic scope: if the employer only does business in Pennsylvania and its clients are all in Pennsylvania, it would be unreasonable to preclude the employee from working in the same industry in California.
A nationwide Covenant Not To Compete may be reasonable where the employer is an Internet-related business, since the Internet is not limited by state boundaries. National Business Services, Inc. v. Wright, 2 F.Supp.2d 701 (E.D. Pa. 1998).
- A Covenant Not To Compete must be reasonable in its temporal scope: Pennsylvania courts typically find one to three years a reasonable time period.
A New York federal court recently found a one-year Covenant Not To Compete covering an employee responsible for the content of all of EarthWeb's websites to be unreasonably long, "given the dynamic nature of this industry." Earthweb, Inc. v. Schlack, 71 F.Supp.2d 299 (S.D.N.Y. 1999).
A Kansas federal court similarly held that a three-year Covenant Not To Compete involving an employee responsible for Internet telecommunications was unreasonable because of the "explosion of technology". Sprint Corp. v. DeAngelo, 12 F.Supp.2d 1188 (D. Kans. 1998).
A future employer may ask you if you have entered into a Covenant Not To Compete.
- Why? The former employer (with whom you have a Non-Compete Agreement) can sue your current employer if the current employer knew about your Covenant Not To Compete and encouraged you to breach it.
- If the prospective employer thinks that your earlier Non-Compete Agreement is unenforceable (it may be too broad, the companies are not competitors, etc.), the employer may agree to assume your legal expenses if you are sued for breaching the Non-Compete Agreement.
- If the prospective employer thinks your earlier Non-Compete Agreement is enforceable, you may not get the job -- this is another reason to understand what you are signing.
Covenants Not To Compete are, rightfully, very important to employers in high tech industries. They may be very hesitant to "give in" on these issues in negotiations. Nevertheless, you might suggest certain modifications to a Covenant Not To Compete.
- If the employer is only worried about your going to work for specific competitors, ask that those companies be named in lieu of general non-compete language.
- Alternatively, ask the employer to narrow the definition of "competitor".
- Ask the employer to agree to limit the application of the Covenant Not To Compete so that it is only effective if you voluntarily resign.
- Goal: do not unnecessarily limit your ability to find future employment.
Other types of restrictive covenants:
Non-disclosure or Confidentiality Agreement: You agree that certain information is confidential and that you will not disclose it or use it to benefit anyone other than the employer. Generally speaking, state laws already prohibit the use of confidential information, so signing a non-disclosure agreement may not have a major impact on you. By signing a Non-disclosure Agreement, however, you are recognizing that certain information is confidential, and this may be used as evidence against you (i.e., it will be easier for the employer to show that you knew the information you disclosed was confidential).
Non-recruitment: You promise not to recruit the employer’s workforce. Like Covenants Not To Compete, these must be reasonable.
Non-solicitation: You promise not to attempt to take the employer’s customers. Like Covenants Not To Compete, these must be reasonable. For example, it is reasonable for a non-solicitation agreement to preclude you from soliciting customers with whom you actually had contact.
The bottom line: Do not sign a Covenant Not To Compete -- or any other contract -- unless you understand the terms and consider their impact on you.
Useful links:
Promising Not To Compete With Your Employer
general information on employment law issues
Do I Have To Sign A Nondisclosure Agreement?
Evaluating Your Employment Contract
Disclaimer: This material is provided free as a service to the high tech community. We don't guarantee that it's current, useful, or even vaguely accurate. For all you know, it could be pure garbage that we generated with a copy of the US tax law and a Markov chaining program. We take no responsibility whatsoever for anything bad that happens to you, ever. Have a nice day.