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Enforcing Non-Compete and Confidentiality Agreements

Non-compete and confidentiality agreements are critical for business success and may form a core part of the intellectual property assets of a business. When dealing with these agreements issues arise as to the scope of their enforceability, how a business may or may not successfully implement and maintain the enforceability of these agreements and, for the individuals that may be subject to these agreements, how to successfully defend against them. We assist our clients at both the business and individual level in addressing issues of non-compete and confidentiality agreement enforceability and litigation.

If you are currently presented with questions or issues involving the enforceability of non-compete and confidentiality agreement, below is a useful guide that will assist in evaluating enforceability standards.

Guide to Non-Compete Agreements and Their Enforceability

STEP 1: Evaluate The Reason for the Non-Compete.

In evaluating the reason for the non-compete agreement, there are some initial factors that must be considered regarding the type of transaction or event that gave rise to the non-compete agreement. Did the non-compete agreement arise from:

(a) an employment relationship where the agreement was signed in the course of employment;

(b) a business ownership relationship where the non-compete agreement arose in the course of a shareholder agreement, partnership agreement or member operating agreement;

(c) a business transfer or sale where the non-compete agreement may be a part of the sale agreement or a post-closing restrictive covenants; or

(d) expiration of a franchise agreement that triggers post-termination restrictive covenants.

STEP 2 Evaluate the Enforceability Level.

Non-compete and confidentiality agreements are heavily scrutinized and enforceability varies depending how the non-compete was drafted and specific facts related to the relationship between the parties.

(Lower Enforceability) - Non-Competes and Employment Relationships

In many states non-competition covenants and obligations created as a result of an "employer - employee" relationship face extreme scrutiny. Within this employer relationship, a distinction must be made between "contract employees" and "at-will" employees. Enforceability among contract employees will be much greater than at-will employees but the specific facts and agreement provisions will matter.

At-Will Employees. At-will employees are employees who possess no contractual rights to continued employment. That is, there is no agreement that prohibits the employer from terminating the "at-will" employee. This compares to a "contract employee" who is guaranteed a specific employment term period whereby he or she cannot be terminated unless the employer establishes a breach of the employment agreement. Non-compete agreements are much more difficult to enforce against at-will employees when compared to franchise employees.
Contract Employees. Contract employees, unlike at-will employees, are granted a form of employment protection within their employment agreement. Courts may be more likely to enforce a non-compete against a contract employee than an at-will employee.

(Moderate Enforceability) - Partnership and Shareholder Relationships

When the non-compete arises within the context of a relationship between shareholders and partners in closely-held companies, enforceability levers increase and rise to a moderate level. When dealing with shareholders and partners non-competition obligations may exist and arise from both a contractual level and an inherently implied level related to the fiduciary duties and obligations that the law imposes on partners and shareholders.

(High Enforceability) - Business Transfers and Sales

Many asset sale and stock sale agreements - related to the transfer and sale of a business - include post-closing non-competition covenants and obligations. These obligations and covenants, although not guaranteed, are likely to be enforced by courts.

(High Enforceability) - Franchise Agreement Expiration

Franchise agreements include post-termination restrictive covenants and non-compete obligations. These covenants are typically enforceable but the level of enforceability will be dependent on facts related to the actual franchise agreement and the events giving rise to the franchise agreement termination.

The enforceability of non-competition and confidentiality agreements require a balancing of a number of factors unique to the type of relationship that gave rise to the agreement and the actual relationship itself. Litigation strategies related to non-compete agreements require strategic planning and strategy that is based on the facts giving rise to the agreement and the goals to be accomplished.

Charles Internicola

by Charles Internicola
National Business and Franchise Lawyer

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