Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Connecticut

In general, Connecticut statutes prohibit any non-competition agreements that restrict the right of any person to receive compensation for skilled or unskilled labor.  There are, however, four situations in which such agreements will be permitted and they are:

• When a business is being sold or purchased
• When necessary to protect trade secrets, known as “non-disclosure agreements”
• To recover training expenses for persons employed less than 2 years
• When they involved executive or management employees and their professional staff

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Connecticut courts have determined that the offer of initial employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate. An agreement signed after the employment has begun may not have the requisite consideration unless it is accompanied by additional pay or a promotion.

Reasonableness in Time and Geographic Scope

Agreements that fall within the four exceptions listed above may still be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted.  If a court finds an agreement is unreasonable, it may use what is known as the “blue pencil rule” to modify the agreement so that it does not unduly infringe on the former employee’s ability to work.  This rule allows the court to delete any part of the agreement that can be deleted without disturbing the remainder if the parties have indicated an intent that the parts of the agreement are severable.

Examples of non-compete agreements that Connecticut courts have found to be reasonable include:

• A 2-year restriction on a former salesman of a real estate brokerage from competing within a 15-mile radius of the former employer’s office.
• A 2-year year restriction on a former employee of an international supplier of certain web-based systems from obtaining employment with a similar company anywhere in the U.S. or any foreign country in which the former employer had sold its products within the one year preceding the termination of employment.
• A 1-year, 10-mile-radius restriction on employee hair stylists that also included eight specified towns.
• A 2-year restriction on a financial products salesperson from competing for the business of Connecticut credit unions and their members within one county.

The courts have found restrictive covenants unreasonable or used the “blue pencil” rule to modify agreements in these situations:

• A 1-year, worldwide restriction on a salesperson from selling “interconnect products” in direct or indirect competition with the former employer.
• A 2-year restriction on a building inspector from working anywhere for any competitor.
• A 100-mile restriction on an insurance industry employment recruiter was reduced to all of the state of Connecticut except Fairfield County.
• A 50-mile-radius restriction on a former pest control service employee.  The court declined to use the “blue pencil rule” to modify the agreement.

 

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.