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 Vermont

Vermont 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 proprietary confidential information, good will, customer relationships and investment in special training of employees.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Vermont courts have determined 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.

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, whether the employee’s departure was voluntary and whether the employee is able to find other employment.

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

• A 90-day restriction against a customs broker from competing within 100 miles of two or three of the former employer’s offices.   The court modified the original agreement which had prohibited competition with any of the employer’s 21 offices along the U.S./Canadian border.
• A 1-year, statewide restriction against a salesman because the geographic limitation matched his former territory.

The courts have found the following restrictive covenant unreasonable:

• A 3-year restriction against a former employee from competing in any current territories and any territories to which the employee knew the employer intended to expand.

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.