The enforceability of restrictive covenants, particularly non-compete agreements, can be very difficult for employers to navigate, especially for companies in their “start-up” phase. Technology companies in particular face challenges in structuring non-competes that balance their need to attract talent with their need to protect confidential and sensitive information, while preventing unfair competition by former employees. Many states have developed common law precedent as to what constitutes a permissible non-compete, while others have enacted statutes. Emerging technology companies must be aware of the laws in their jurisdictions in order to draft enforceable restrictive covenants that adequately protect business needs. The below chart presents a summary of employee non-competition laws and applicable standards in four states where emerging technology companies often do business: California, Massachusetts, New York, and Texas.
|Statutes/ regulations governing non-competes||Sections 16600 to 16607 of the California Business and Professions Code govern non-competes.||Massachusetts Noncompetition Agreement, Act, M.G.L. c. 149, § 24L (effective for agreements made on or after Oct. 1, 2018).||No statute or regulation governing non-competes generally.||Texas Covenants Not to Compete Act, Tex Bus. & Com. Code Ann. §§ 15.50 to 15.52.|
|Essential Elements||Post-employment non-compete agreements are unlawful except in the context of a sale of a business.||
To be valid and enforceable, a non-compete agreement must:
-be in writing and signed by both the employer and employee;
-expressly state that the employee may consult with an attorney before signing;
-be provided, if made before employment begins, to the employee by the earlier of either: (a) formal offer of employment; or (b) at least 10 business days before employment begins;
-be supported, if made after employment begins but not in connection with termination of employment, by fair and reasonable consideration independent from continued employment; and provided to the employee at least 10 business before agreement is effective;
-be no broader than necessary to protect the following legitimate interests of the employer: (a) trade secrets; (b) confidential information that is not a trade secret; or (c) the employer’s goodwill.
New York common law disfavors non-compete agreements as an unreasonable restraint of trade.
Courts may enforce a non-compete if the restriction is reasonable. Although courts evaluate non-competes on a case-by-case basis, a non-compete can be enforced only if it:
-is no greater than required to protect an employer’s legitimate protectable interests;
-does not impose undue hardship on the employee;
-does not cause injury to the public;
-is reasonable in: duration; and geographic scope
New York courts have recognized the following protectable interests that may be sufficient to support a reasonable non-compete:
-employer’s trade secrets or confidential information;
-employer’s interest in preventing loss to a competitor of an employee whose services are special, unique, or extraordinary.
To be enforceable under Texas law, a non-compete must:
-be ancillary to or part of an otherwise enforceable agreement when the agreement is made;
-be reasonable concerning time, geographical area, and scope of activity to be restrained;
-impose no greater restraint than necessary to protect the employer’s (or promisee’s) goodwill or other business interest.
|Burden of Proof||Plaintiff-former employer bears the burden of proving that a statutory exception applies to the general rule prohibiting non-compete agreements.||Employer has the burden of proof to enforce a non-compete.||
Party seeking enforcement of the non-compete (typically, the employer) has the burden of proof.
|If primary purpose of the ancillary agreement is to obligate the employee to provide personal services, the employer has the burden of proof to show that the covenant is reasonable.|
|Circumstances of Departure Relevant||Does not matter whether employer or employee terminates the relationship. Post-employment non-competes are unenforceable in California unless a narrow exception applies.||
Employers may not enforce non-compete agreements entered into on or after Oct. 1, 2018, against employees who have been:
-terminated without cause;
While NY courts are not entirely in agreement regarding whether non-compete agreements are enforceable against employees who have been terminated by the employer without cause, an increasing number of cases seem to find that they are not enforceable under those circumstances.
If the termination constitutes a breach of contract by an employer, any post-employment non-compete in that agreement cannot be enforced by the breaching employer.
|Unless non-compete says otherwise, whether employee terminated or voluntarily departed is not-relevant.|
|Consideration||Not applicable, as non-competes are not enforceable in California and are void against public policy, unless narrow exception applies.||
Massachusetts courts have determined that the employment relationship itself is sufficient consideration for a non-compete agreement signed at the beginning of the employment relationship.
For agreements signed after hire, continued employment is not sufficient consideration as required under the Massachusetts Noncompetition Agreement Act.
Initial employment, and under certain circumstances, continued employment, suffices.
Payments to the employee.
Intangibles, including the employee’s receipt of increased:
|To be considered sufficient in Texas, consideration must give rise to the employer’s interest in restraining the employee from competing, and the covenant must be designed to enforce the employer’s consideration or return promise.|
|Time Range||Not applicable, as non-competes are not enforceable in California and are void against public policy, unless narrow exception applies.||
Massachusetts Noncompetition Agreement Act prohibits a restricted period of longer than one year from the date the employment ends. A restricted period may extend to a maximum of two years only if the employee:
-breached her fiduciary duty to the employer; or
-has unlawfully taken the employer’s property, either physically or electronically.
Courts have repeatedly held that six months or less is reasonable.
Courts have found longer restrictions to be either reasonable or unreasonable depending on facts of particular case.
|Time restrictions ranging from two to five years have repeatedly been enforced in non-competes.|
|Geographic Restrictions (or other scope of enforcement)||Not applicable, as non-competes are not enforceable in California and are void against public policy, unless narrow exception applies.||
Under the Massachusetts Noncompetition Agreement Act, a geographic restriction is presumed reasonable when the reach is limited to regions where, for the last two years of employment, the employee:
-had a material presence of influence.
|When determining whether a non-compete is reasonable in its geographic reach, New York courts focus on the facts and circumstances of each case.||
Limitations based on the former employee’s territory during employment are valid.
Another approach, applicable in some circumstances, is to limit the geographic restriction to the area of the employer’s operations.
Click here to read the full GT Alert, “A Non-Compete Law Roadmap for Tech Start-Ups in Key Jurisdictions.”