I’ve had a number of clients over the years comment that noncompetition agreements aren’t enforceable. As a blanket statement, that’s simply not true, although some states — most notably California — severely restrict them.
It is true that courts aren’t big fans of restrictive covenants. And it’s not unusual for a court to refuse to enforce a noncompetition agreement. However, it’s often the case the problem lies in the noncompetition agreement itself when considered in the context of applicable law.
A case in point is the noncompetition agreement at issue in NanoMech v. Suresh, an 8th Circuit case which was filed last month. In that case, NanoMech tried to enforce a noncompetition agreement against a former employee who went to work for a competitor. Applying Arkansas law, the federal district court refused to enforce the noncompetition agreement, and the 8th Circuit affirmed the decision.
Here’s the provision:
The Employee agrees that during the term of this Agreement, and for two (2) years following termination of this Agreement by the Company, with or without cause; or, for a period of two (2) years following a termination of this Agreement by the Employee, the Employee will not directly or indirectly enter into, be employed by or consult in any business which competes with the Company.
Note that the provision is not limited in geographic scope or as to the NanoMech competitors to which it applies or the activities Suresh is prohibited from performing. This proved fatal to NanoMech’s claim.
Noncompetition agreements are enforceable only if they are reasonable because courts don’t like restraints on trade. Under Arkansas law noncompetition agreements are deemed reasonable restraints of trade — and thus enforceable — if they are “no greater than what is reasonably necessary to secure the interest of the party protected by the contract and is not so broad as to be injurious to the public interest.”
As stated by the 8th Circuit, a noncompetition agreement is enforceable under Arkansas law if it meets this rule: “(1) the [employer] must have a valid interest to protect; (2) the geographical restriction must not be overly broad; and (3) a reasonable time limit must be imposed.” The court also noted that under Arkansas law, noncompetition agreements must be valid as written, and courts aren’t permitted to narrow them, as is the case in many states.
The district court held that NanoMech’s noncompetition agreement was unenforceable because it didn’t contain a geographic restriction and it didn’t define what activities Suresh was prohibited from performing for a NanoMech competitor. The 8th Circuit affirmed using the same reasoning.
For a discussion of the law in Missouri, see my post Non-Competes in Missouri, in which I discuss the state of the law in Missouri and provide some tips for ensuring that your noncompetition agreements are enforceable.
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