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Can your business enforce an employee noncompete agreement?

The analysis of the enforceability of noncompete agreements begins with the question “How did the covenant not to compete arise?”  Employee covenants not to compete generally arise in one of two ways:  1) solely as a result of employment; and 2) arising as ancillary to another agreement, such as an agreement to purchase the prospective employee’s business.

 

Covenants not to compete that arise solely as a result of employment generally arise in two ways:  1) an agreement simply required in order to be employed; and 2) an agreement for which separate consideration is paid by the employer to the employee, other than the bare offer of employment. In Virginia, as much as a matter of fact as a matter of law, covenants not to compete demanded solely in order to obtain employment tend to be more “disfavored” by courts than covenants not to compete that were independently negotiated and compensated.  Further, covenants not to compete that arise from ancillary agreements, such as agreements to purchase businesses, tend to be even less disfavored by Virginia courts.  The reasons are obvious.  When a prospective employee is required to enter into a non-competition agreement solely as a condition of employment, without further consideration, the employee is not really getting anything in exchange for the agreement.  The employee is going to have to work in order to get paid.

However, where the employee bargains with the employer for the non-competition agreement, where the employee gets paid for the agreement or obtains some other consideration, and where it is not simply a condition of employment, the equities shift somewhat in favor of the employer to whom the duty is owed.  The employer gave up something other than the mere right to work and the employee obtained the benefit.  Further, where such agreements are ancillary to other agreements, such as the sale of a business, the facts often suggest that the employee was compensated  for the agreement in the form of part of the purchase price of the business.  There the equities shift further in the direction of the employer.  Generally, it is considered bad form for a person to sell his business and subsequently move down the street and recreate it to compete with the buyer.

Therefore, depending upon your status as employee or employer, you will want to discuss with your lawyer the purpose for the noncompete agreement before it is executed. We analyze even more issues relating to noncompetes in this Tarley Robinson library article.

Tarley Robinson, PLC, Attorneys and Counsellors at Law

Williamsburg, Virginia

Republished by Blog Post Promoter

Neal Robinson

Neal specializes in corporation and business entity law, mergers and acquisitions, business planning and strategic analysis. His clients have ranged from start-up operations to well established organizations.

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Filed under: Business Planning, Merger & Acquisition, Neal J. Robinson by Neal Robinson

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