March 3, 2017

Non-Competes as an Employee

by William A. Nolan, Barnes & Thornburg, LLP

Q. Are non-competes really enforceable?
A. In almost all states, yes. Unlike most contracts, where contracting parties are free to make a bad bargain, courts will review non-competes to determine if they are reasonable. But people who assume a non-compete is unenforceable may be in for a rude surprise.

Q. You said “almost all states.” What does that mean?
A. A very small number of states – most significantly California – do not allow non-competes. It is also important to note that the rules for interpreting non-competes vary from state to state, and these differences can be very important in disputes potentially involving more than one state.

Q. My non-compete says Ohio law applies. Isn’t that the end of the question?

A. Not necessarily. Courts may not enforce the contract’s “choice of law” if they consider it contrary to the policy of their own state. For example, an Indiana court might disregard contractual language that says Ohio law might apply because Indiana’s rules for interpreting non-competes are different than Ohio’s.

Q. How do states’ rules differ?
A. In two important ways: first, what a court does with a non-compete can be overly broad. In some states, such as Ohio, the court will in effect rewrite the contract to “make it reasonable.” Other states are less helpful to the enforcing employer and may simply strike some or all of the restriction.

Secondly, an Ohio employee doesn’t need to receive anything of value, besides the right to come to work tomorrow, in exchange for a non-compete. In other states, a non-compete signed in the middle of an employment relationship will not be enforceable unless the employer gave the employee something of value in exchange for it.

Q. So what is reasonable for an employer to put in a non-compete?
A. There is no easy answer. One year is often viewed as a reasonable time period. Longer non-competes may be enforceable, especially for higher level employees or employees with access to critical information.

With regard to other aspects of the non-compete, such as geographical or activity limitations, courts will often look at whether the limitations approximate what the employee was actually doing for the employer. For example, an employer may not be able to restrict an employee from competing in Michigan if the employee’s job duties had nothing to do with Michigan.

Q. What happens to the non-compete if you are fired?
A. In most states, including Ohio, the non-compete is still enforceable. But in determining what is a reasonable restriction on the employee, a court may consider the circumstances of the employee’s departure.

Q. What happens to the non-compete if the company is purchased by another entity?
A. This is another area where the answer may vary state to state. In Ohio, a non-compete may be assigned from one company to another in the event of an acquisition. However, courts will usually examine whether the non-compete has language that put the employee on notice of this possibility.

Bottom Line: There are a lot of moving parts, and whether you are the employer or the employee, you probably need experienced counsel to help you understand the many possible scenarios to interpret an agreement.

William A. Nolan