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 Massachusetts

Massachusetts 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 trade secrets or confidential information. 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. Massachusetts courts have determined in the past that the offer of initial 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.  However, some court opinions decided more recently have begun to lean away from that rule and require the promise of something new (a bonus or a promotion) on the part of the employer in order to make the agreement enforceable.

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 but still protect the former employer’s legitimate business interests.

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

• A 1-year,10-mile restriction against a personal trainer because of the personal relationships he had built with the former employer’s clients.
• A 1-year restriction against an auto dealership’s former finance manager from working for any other dealership within seven miles and from any dealership selling the same make of cars as the former employer within 35 miles.
• As modified by the court, a 2-year, 48-state restriction against the former president and vice president of a consulting business.  Originally the agreement included the U.S. and Canada for a period of three years.  

The courts have found the following restrictive covenants unreasonable:

• A non-solicitation and non-competition agreement against the former employee of a court reporting business from competing throughout New England.
• A 100-mile restriction against a former manager of an information technology professional staffing firm because the restriction was arbitrarily selected by the employer.

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.