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SMART ANSWERS
By Karen E. Klein
MAY 2, 2000


All Tied Up: A Look at Noncompete Agreements

Each state has different laws, so make sure you know the ropes before you sign

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Q:  I work for a test-prep company, and I'd like to start my own test-tutoring business. I was originally hired in a different city (by a separately owned franchise) and signed a noncompete agreement, which said that I couldn't work for another test-prep company for a year after leaving. I didn't sign anything when I came to work for the new franchise. Could the franchise here enforce the original agreement against me? If the agreement says I can't work for another test-prep company, does that mean I can't start my own?

-- D.R., Boston

A:  Employers use "covenants not to compete" to protect their competitive positions. They may restrict employees from working for a competitor or disclosing confidential information once they leave. Overly broad covenants -- such as those that try to restrict employees from working for any competitor, anywhere in the country, for more than a year -- seldom stand up in court because they unfairly deprive employees of their ability to earn a living. Likewise, if a noncompetition agreement smacks of punishing someone for leaving a job, courts are likely to strike it down.

To be enforceable, an employer must show that the agreement protects a legitimate business interest, imposes reasonable time and geographic limitations, does not unduly restrict the employee from earning a living, and is supported by "consideration." That is, the employer must give the employee something in exchange.

"Usually the consideration is the job itself," says Phillip Trobaugh, an attorney whose practice includes noncompete contracts at the Minneapolis law firm of Mansfield, Tanick & Cohen. In Massachusetts, courts have ruled that continued employment qualifies. But in other states, including Pennsylvania, Connecticut, and North Carolina, the employer must give an employee something else -- a bonus, a raise, a promotion, or stock options.

LIMITED ABILITIES. Each state has different laws governing "covenants not to compete," so you should have a local attorney advise you on the particulars of your case. A provision of California law, for instance, renders unenforceable noncompetition agreements between companies and their employees. Other states make them valid only under limited circumstances.

Experts say if the covenant you signed is enforceable in Massachusetts, it would probably limit your ability to start your own business. "Generally speaking, anything that's competitive may be held to be a violation of the noncompete, whether you're starting your own company or working for someone else -- unless the agreement is very narrowly tailored," says Trobaugh.

If you signed a contract with the parent company (rather than just with a particular franchise owner), you probably can't open a competing business for one year in any location where your company would potentially take clients away from one of the offices under the parent company's umbrella. "It depends upon the scope of the agreement that was signed," says R. Scott Brink, a partner in the employment group at the law firm of Jeffer, Mangels, Butler & Marmaro, in Century City, Calif. "Did it have geographic limitations, or did it permit competition in other places? Was it limited to that one franchise, or did it apply to the parent company in general?" The language is key here. Your attorney should be able to tell you how narrowly or broadly it is structured.

RESOURCES. You can find more information on this question in a legal reference book called, Covenants Not to Compete: A State-By-State Survey by Brian M. Malsberger, Arnold H. Pedowitz, and Robert Sikkel. Published by the Bureau of National Affairs Inc., it was prepared with the American Bar Assn.'s Labor & Employment Law Section's Committee on Employee Rights & Responsibilities, and it covers statutes, leading cases, and emerging trends on covenants not to compete in each state.

A couple of legal Web sites, www.lawoffice.com and www.nolo.com, also have informational databases and books that you might find useful.


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