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Noncompete Covenants

A brief overview

A covenant not to compete comes up in employment agreements.  It also comes up in the sale of a going business.

There is ample reason for restricting the seller of a going business from competing against the person who just paid for the goodwill of that going business.  There is usually little reason for restraining an employee from going to work for a competitor if the customers are not special customers who have developed a special, long term relationship with the employer.
Nevertheless, many employers include non-compete covenants in employment contracts.  They can pose a real hardship on the employee.

The old cases recognized that enforcing a non-compete against an employee was the exception, not the rule.  We are supposed to have free and open competition; and to restrain someone from getting a job in a field he knows is against the model or ideal of open competition in the market place.   The time honored example of enforcing a non-compete against an employee was the example of the so-called “route cases.”   The rationale was that the route salesman had developed contacts with the managers in all the stores on his route, and if he jumped ship, he could take those customers to his new employer (an example often give was a milk salesman who called on super markets).

One of the tough areas today involves franchise agreements.  They pose knotty problems.

Another difficult area involves financial advisors.  Using an old name, suppose someone fresh from college went to work for E. F. Hutton.  E. F. Hutton sent the young person to specialized training which E. F. Hutton had developed over many years at substantial cost.  Is it not fair to restrict that person from going to work for, say as an example, a big bank that has a financial services subsidiary that is a registered broker-dealer?   And whose customers are they?  Did the young man go find them himself?  Were they “handed to him” due to the retirement of a seasoned, successful veteran?

Cases in this field, as in others, are fact driven.  The circumstances matter.  No one should sign a non-compete agreement without getting some advice, in my opinion.

This page was written on 11233.

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