Covenants Not to Compete

Let’s say that you are an employee at a company and you have signed an employment contract. Either in your contract or in a separate document that was signed and dated on the same day, you have agreed to not compete with your employer’s business. Then, you decide you want to leave your current job to start your own business. However, your new venture would breach your employment contract since it is in the same area of business as your former employer’s company.

In a covenant not to compete, a court will first consider the area in which you cannot compete. It must be reasonable. Usually this includes the area in which the former employer currently does business and perhaps the immediate surrounding area. If your former employer has drafted the area in an expansive fashion, it will become void in court and a smaller area will be decided upon. However, if your business is in the same city as your former employer’s it is unlikely that the court will side in your favor.

The next consideration is the length of time in which you cannot compete. Once again, a court will only enforce what is reasonable. If the length of time is unreasonable, the court will decide what is reasonable. The longest I’ve seen is five years, but that is unusual. Typically, this would be judged as unreasonable. What if the length is one or two years? Should you wait to start your business? Or can you proceed, with the odds on your side?

Well, the definition of the business with which you cannot compete may hold the answer. Perhaps this definition is too broad. What is reasonable? Well, the answer is similar to the same issue in anti-trust matters. What is the market where the employer competes? If your employer manufactures, but does not retail, toys, does the market include toy retail, or just the toy manufacturing business? This also is a matter of the court’s judgment. If a judge or jury is likely to rule that your product is not covered by the covenant’s definition of business, the employer will probably not pursue you, even if you fall within a reasonable area and time.

Of course, your employer may attack you, even if the covenant will probably not apply to you. The pursuit could drive you out of business, by making you spend a lot of money on attorney fees. Then again, your employer would have to spend a lot of money, too. Consult a knowledgeable and experienced attorney to decide whether you are going to have a problem with your covenant not to compete, and what can be done about it.

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