Companies routinely use non-compete agreements to protect their sensitive information after their employees quit or are fired. These agreements prevent a former employee from working in the same industry within the same geographic area for a certain period of time.
Pennsylvania and other states generally allows employers to enter into these agreements with some or all of their workers, but not to the extent that they interfere with a former worker’s right to earn a living. To guard against abuse, the court will closely scrutinize a non-compete agreement when a former employee challenges its validity. Specifically, in Pennsylvania and most states a non-compete agreement is valid and legally enforceable only if it meets the following criteria:
- The employee received consideration in exchange for signing the agreement
- The agreement supports the employer’s legitimate business interest
- The agreement’s terms are reasonable in scope, length of time and geography
As with any contract, there must be consideration in exchange for agreeing to take action or refrain from doing so. Generally, being hired for a job in exchange for signing the agreement is sufficient consideration for the employee. A legitimate business interest can include protecting confidential information or the company’s relationships with its customers.
Is it reasonable? It depends
Finally, there is the reasonableness requirement. There is no hard and fast rule on whether the terms of a noncompete are reasonable. It depends on the facts of the particular case. For example, prohibiting someone from working in your business’ industry within a certain distance from your headquarters may or may not be reasonable depending on the amount of competition in your area, the ability of the ex-employee to work outside of the forbidden zone and other factors. Similarly, a ban on working in the industry for a fixed period of time may or may not be reasonable depending on the individual circumstances.
As a business owner, a strong and enforceable non-compete agreement can help you shield your trade secrets, goodwill and other valuable assets. But only if it is carefully and properly prepared.