If you have signed an agreement that contains a non-compete clause, you should consult with top-tier business attorneys to see if there are legal methods of getting around the clause. A non-compete clause/agreement generally bars a person from competing against the business with which the non-compete has been signed. Typically, these are inserted into employment agreements and when a business is sold. Depending on the non-compete provision and the circumstances, there are many potential legal theories available.
To begin, in many states, non-compete clauses and agreements are unlawful and cannot be enforced (particularly in an employment setting). For example, in California, non-compete agreements (also called “restrictive covenants”) are, in general, prohibited. See Cal. Bus. & Prof. Code, § 16600 which states in pertinent part: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” This is because non-compete agreements and clauses prevent persons from engaging in employment that would be essential for self-support and support of family and are generally anti-competitive and, in theory, impose burdens on innovation.
That being said, there are exceptions where non-competes will be enforced in California mostly involving the sale of a business and its associated goodwill. As part of the purchase/sale agreement, the previous owners can lawfully be prohibited from competing against the business just sold. There is a similar statutory provision with respect to partners who are disassociated from a partnership. But even when allowed, the non-compete clause or agreement must be reasonable in geographic area and in duration. Other states that ban or severely limit non-compete clauses/agreements include North Dakota, Montana, and Oklahoma. Other states, such as Colorado and the District of Columbia, are moving to enact legislation that would bar or restrict non-compete clauses/agreements. So, in contemplating how to get around a non-compete clause/agreement, the first step is to retain experienced business lawyers to review your non-compete and provide counsel with respect to local and state law.
Another well-known and often successful attack on non-compete agreements/clauses flows from the requirement that they be reasonable. As noted above, a non-compete must be geographically and temporarily reasonable. Generally, the geographical component relates to where the business operates. If the business operates nationally, then some courts will hold that it is reasonable for a non-compete to have a national geographic limitation. By contrast, if the business operates only in, say, Detroit, most courts would hold it UNREASONABLE for a non-compete to extend to the whole of the country. In terms of duration, generally, two years or less is deemed reasonable. Again, experienced and proven non-compete lawyers can review your non-compete clause/agreement and provide counsel with respect to the reasonableness of the clause/agreement.
Another possible legal avenue of attack concerns the legitimate business reasons for the non-compete clause/agreement. Say, for example, that the business requiring a non-compete clause/agreement is legitimately concerned to protect trade secrets and confidential business methods and operations. A court might hold it reasonable to impose a non-compete clause/agreement on an employee who had access to that data/information. However, just as likely, a court would hold such an agreement unreasonable for an employee who had no access to the data/information. A court might hold that such an agreement was punitive and arbitrary.
Other potential arguments include:
- Arguing lack of consideration for the non-compete clause/agreement
- Arguing that the business breached the contract first nullifying the non-compete clause/agreement
- Arguing that there is no breach since the new employment/business is not competing with the previous employer/business
Contact a Non-Compete Lawyer at Revision Legal
If you need help evaluating the validity of a non-compete clause/agreement, contact the employment and business lawyers at Revision Legal at 231-714-0100.
The FTC Rule on Non-Competes and Federal Developments
In April 2024, the Federal Trade Commission issued a final rule that would have banned most non-compete agreements between employers and workers nationwide. The rule was challenged immediately in federal court, and in August 2024, a federal district court in Texas set aside the FTC’s rule, finding the FTC had exceeded its statutory authority. The Fifth Circuit Court of Appeals has the matter under review. As of the current date, the FTC’s non-compete ban is not in effect, but the legal landscape continues to shift rapidly. Employers and employees alike should monitor these federal developments closely. If federal courts ultimately uphold a version of the FTC rule, it would represent the most significant change to non-compete law in American history — rendering the vast majority of employee non-compete agreements unenforceable regardless of state law.
Challenging Non-Competes on Consideration and Timing Grounds
Even in states that permit non-compete agreements, there are often technical grounds to challenge their enforceability. One of the most powerful challenges is the failure of consideration. In many states, a non-compete agreement signed after employment has already begun is unenforceable unless the employer provided additional, specific consideration beyond continued employment — such as a promotion, a bonus, a pay raise, or access to trade secrets. Merely requiring an existing employee to sign a non-compete as a condition of keeping their current job, without providing anything new in return, can render the agreement void for lack of consideration.
Courts also scrutinize whether a non-compete was presented to an employee with adequate time to review and understand its terms. A non-compete handed to an employee moments before they are required to sign it — particularly when the employee has already left another job to take the new position — may be unenforceable due to economic duress or procedural unconscionability. Additionally, if the non-compete is contained in a lengthy employment agreement and the employee was not specifically directed to review the non-compete provisions, courts in some jurisdictions have declined to enforce it.
Garden Leave and Buy-Out Provisions
An increasingly common approach to non-compete issues in sophisticated employment agreements is the “garden leave” clause. Rather than simply prohibiting competition, a garden leave provision pays the departing employee their full salary during the restricted period in exchange for their agreement not to compete. Courts are significantly more likely to enforce a non-compete backed by garden leave because the employee is receiving genuine economic benefit — their salary — in exchange for the restriction. Some state legislatures have made garden leave a legal requirement for non-competes to be enforceable: Illinois, for example, requires that non-compete agreements lasting more than six months be accompanied by paid garden leave or “equivalent consideration.” Similar requirements have been adopted in Washington state.
Another option for employees facing a non-compete is to negotiate a buy-out of the restriction. Many employers will agree to release an employee from a non-compete for a lump sum payment or in exchange for other consideration — such as forgoing severance, returning stock options, or agreeing to a shorter garden leave period. Whether a buy-out is advisable depends entirely on the enforceability of the non-compete and the realistic consequences of competition. A thorough legal analysis is required before entering into any buy-out negotiation.
Contact Revision Legal for Non-Compete Counsel
Whether you are an employee trying to move to a competitor or a business seeking to enforce a non-compete against a departing employee, the legal issues are complex and jurisdiction-specific. Revision Legal’s business attorneys have deep experience counseling both sides of non-compete disputes. We provide honest assessments of enforceability, strategic guidance on how to proceed, and if necessary, litigation representation to protect your rights in court. Contact us today.
