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 Delaware

Delaware courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect certain business interests of the employer such as customer relationships or trade secrets. Factors considered when determining reasonableness include the hardship an agreement puts on the former employee, its effect on the general public and the restrictions placed on time, territory and activity of the former employee.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Delaware courts have determined that the offer of initial employment or continued employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.

Reasonableness in Time and Geographic Scope

Agreements may 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 modify the agreement so that it does not unduly infringe on the former employee’s ability to work.

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

• A 1-year restriction on the former office manager of a maid service covering an area defined by the specific zip codes where most of the employer’s customers were located.
• A 12-month, nationwide restriction against a former regional sales director from soliciting, accepting employment or being retained by any competitor or client of the employer.
• A 1-year restriction against a former employee from selling, soliciting purchasing or promoting the sale of fall-protection equipment to any entity the employee had dealt with personally or through employees he supervised during the time of employment.

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

• A 2-year restriction against an unskilled at-will employee of a janitorial service who had received no specialized training from the employer.  The court found the agreement as a whole to be unenforceable so declined to modify it.
• A 12-month statewide restriction on a former employee of a personal consulting and employment agency business because the “shelf-life” of the knowledge of the former employer’s contacts is very short and the restriction was oppressive on the former employee.
• A 2-year, 5-mile restriction against a former beauty salon employee.
• A 2-year, 25-mile restriction against a former manager of a retail clothing and jewelry store.

 

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.