Employees are increasingly mobile across state lines. This is partly the result of technological change facilitating individual movement and communication, but also a result of corresponding changes in corporate organization to establish offices and interests in multiple jurisdictions. With these developments, there has been a rise in litigation surrounding the enforcement of employee covenants not to compete when the parties or issues involved have connections to multiple jurisdictions. The emerging body of law intrigues and confounds lawyers and commentators because of its complexity and unpredictability. This essay is an effort to describe recent legal developments in the United States, situating them within the background doctrines of conflict of laws and parallel litigation that govern such disputes. Our aim is to provide a useful comparison with the other essays in this volume dealing with developments in other countries on the same subject.
A covenant not to compete (also referred to as a restrictive covenant or non-compete agreement or NCA) is an agreement that an employee will not compete against the employer, or go to work for a competitor, for some specified period after termination of employment. The contract typically also specifies a geographic region, and may specify a trade or profession in which competition is prohibited. Although such restrictions are presumptively unenforceable at common law on public policy grounds, courts in most states will grant an exception if the employer can demonstrate that the covenant in question safeguards a legitimate interest and is reasonable in its scope. The most commonly recognized legitimate interest is the protection of trade secrets. Depending on the state, courts may also recognize other legitimate interests such as customer relationships and goodwill, confidential information not rising to the level of a trade secret, and the services of employees with unique or extraordinary talents (although ordinary training is not usually protectable).
The other limitation on enforceability is that the covenant must be "reasonable." A broad set of public policy concerns informs the reasonableness test: courts are concerned with protecting employees from hardship, often citing inequality of bargaining power as a basis for giving special scrutiny to non-compete agreements. Courts also articulate a general resistance to restraints on trade. There is a strong imperative that the restriction be no greater in terms of duration, geographic scope, and limitation on vocational activities than is reasonably necessary to protect the interests of the employer.
Gillian Lester & Elizabeth Ryan,
Choice of Law and Employee Restrictive Covenants: An American Perspective,
Comp. Lab. L. & Pol'y J.
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