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Non-compete agreements: looking at some basic rules

Businesses, particularly those in competitive industries, know that intellectual property protection is important to ensure valuable business information is not misappropriated. Patent and trademark registration, and trade secret enforcement, can be valuable ways to do this, but so can non-compete agreements, if they are used prudently.

Different states have different rules when it comes to the validity and enforceability of non-compete agreements. In general, because non-compete agreements are contracts, they must abide by the principles of contract law. Among other things, this includes the requirement of sufficient consideration, or something given in exchange for the agreement. Consideration can consist of the offering of employment, a promotion, or some other form of compensation. 

Non-compete agreements must also be aimed at protecting valid business interests. Agreements which don’t accomplish this are not likely to be upheld in court. Another important requirement for non-compete agreements is that they must basically be reasonable. Much of the litigation over non-compete agreements comes down to reasonableness.

In assessing the reasonableness of a non-compete agreement, there are several important factors to consider. This includes terms about the geographic area in which the competitive restrictions apply, the duration of the agreement, and the scope of activities the agreements prohibits. Agreements which are overbroad or overly burdensome in these areas are not likely to be upheld in court. In such cases, a court will choose either to not enforce the agreement as a whole, or to make modifications to the agreement so that it is reasonable to enforce.

In our next post, we’ll look at another potentially important factor in the enforceability of non-compete agreements: the status of the employee. 

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