Personnel Practices Non-Compete Agreements

By Matthew R. Plain, Esq. & Kristen M. Whittle, Esq.

When engaging sophisticated employees who will have access to confidential information or trade secrets, many employers require the execution of a Non-Compete Agreement. Such agreements generally prohibit the employee from working for a competitor for a period of time after separation from employment. Non-compete agreements can be powerful tools to guard against disclosure of confidential information and loss of customer good will. But if not implemented properly, they may be considered unenforceable.

Non-compete agreements are generally disfavored in the law because they restrict free trade and commerce, as well as an employee’s ability to work in his or her chosen profession. When challenged, courts will scrutinize these agreements to make sure that they are reasonable. If a court finds a non-compete agreement to be unreasonable, it may reform certain parts of the agreement, or strike the entire agreement altogether.

When determining whether a non-compete agreement is reasonable, a Court will look at the following factors:

1. Whether the agreement is narrowly tailored to protect the employer’s legitimate business interests, such as the protection of confidential information and good will.

2. Whether the agreement is reasonably limited in activity, geographic area and time. Rhode Island courts will typically permit non-compete agreements that remain in effect for one year or less after separation of employment. The geographic scope of an agreement will be considered on a case-by-case basis. In some situations, a 50-mile radius may be considered reasonable, such that an employee may be prohibited from working for a competitor in the State of Rhode Island for a period of time after separation. In other cases, a 10-mile radius may be more appropriate.

3. Whether the employer’s interests are outweighed by the potential hardship to the employee. Rhode Island courts will look to whether the agreement strikes a balance between the employer’s need to protect its good will and confidential information and the employee’s need to earn a living.

4. Whether the agreement is likely to injure the public. For example, Rhode Island courts will analyze whether such an agreement will overly restrict the public’s access to certain products.

Continued employment is generally considered sufficient consideration for a non-compete agreement. In order for an agreement to be enforceable, each party must receive “consideration”—meaning that each party receives something in return. In the context of a non-compete agreement, the employer receives the benefit of the employee agreeing not to work for a competitor. In exchange for this promise, the employer must provide the employee with some benefit, such as a cash payout (this usually occurs when executing the agreement upon separation) or an agreement to continue to employ the employee.

In some cases, a confidentiality agreement and/or a nonsolicitation agreement may be more appropriate than a non-compete agreement. Rather than restricting a former employee’s ability to work for a competitor, an employer may opt for an agreement prohibiting the employee from using or disclosing confidential information gained during his or her employment for a period of time after separation. The employer may also require the execution of a non-solicitation agreement, prohibiting the employee from soliciting the employer’s customers and other employees for a period of time after separation. Although Rhode Island courts will also look carefully at these types of agreements, courts may favor them as less restrictive than non-compete agreements.

As a practical matter, if an employer wishes for an employee to enter into any of these agreements, it may be best to do so at the outset of the employment relationship, so that there is no dispute about them upon separation.

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