Important Facts about Non-Compete Agreements

01 May 2023
Richard Bush
Important Facts about Non-Compete Agreements


WHAT IS A NON-COMPETE AGREEMENT?

A non-compete agreement is a contract between an employer and an employee prohibiting or restricting the employee from directly or indirectly competing with the employer for a specified period of time after the ending or termination of an employment relationship. This means that the employee may not go into business or work for a company that competes with the prior employer. In addition to typically having time restrictions, such agreements may limit their scope to particular geographic areas. Such agreements also frequently contain provisions that protect an employer's confidential information and trade secrets and restrict solicitation of the employer's customers or employees.

WHY DO NON-COMPETES EXIST AND HOW DO THEY IMPACT EMPLOYERS AND EMPLOYEES?

Non-competes are controversial. Employers have legitimate interests in preventing unfair competition and protecting "inside" information regarding strategies, production methods, sales and customers. These concerns are often greater when dealing with executives, engineers, and sales employees servicing established customers. On the other hand, non-compete agreements have the potential to stifle legitimate business competition and restrict the ability of employees to compete in the labor market for better jobs and wages. Such restrictions seem less appropriate for wage earners whose jobs depend upon their own training and experience or upon general knowledge.

Traditionally, non-compete agreements have been more common among salaried executives and other key employees whose employment depends upon particular business, pricing, technical, or customer knowledge. However, non-compete agreements have become increasingly common in recent years, including among blue collar wage earners.

ARE NON-COMPETE AGREEMENTS LEGAL AND ENFORCEABLE?

It’s complicated. Non-compete agreements are governed by statutes and case law that vary from state to state. In fact, the first step in analyzing a non-compete agreement is often determining what state law applies. The applicable law might be determined by the place that an employment contract was made, the place of actual employment, or the provisions of the contract.

Some states have statutes which limit particular types of non-competes, In Ohio, like in most states, non-compete agreements are generally enforceable, but much depends on the particular facts. Further, a non-compete agreement in Ohio can be modified by a court where the court determines particular provisions to be unduly restrictive.

On January 5, 2023, the Federal Trade Commission published for public comment a proposed rule declaring most non-compete agreements to be an unfair method of competition. The FTC states that some 30 million American workers are bound by such non-competes and that eliminating them will increase American workers' earnings between $250 billion and $296 billion per year. The proposed rule states that it would supersede inconsistent state laws.

The proposed FTC rule is not yet adopted and will likely be met by opposition and legal challenge. For the time being, the matter remains governed by state laws.

The attorneys at Green Haines Sgambati Co., L.P.A. have experience in advising clients and litigating issues involving non-compete agreements. If you wish to schedule a consultation, please contact us.

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