How to Prepare an Enforceable Non-Compete Agreement

So, you have decided that you need a non-compete agreement to keep employees from competing unfairly with your business.  If you want to be able to enforce that agreement, you must change the way you think about negotiating a contract.

In most  contract negotiations, your objective is to get as many concessions as possible from the other side.  In preparing a non-compete agreement, however, you must stand that thinking on its head.  A simple example shows the importance of changing your way of thinking.

Assume that I want to buy your house, and we are negotiating over a purchase price.  Your objective is to get me to pay as much as possible for the home; my goal is to pay as little as possible.  More than likely, we will refer to an outside source — an appraisal — to determine a fair price for the home.  If we are both equally interested in making a deal, we likely will settle on a price at or near the appraised value of the home.

What happens if I am unaware of the fair market value of the home and pay $200,000 more than the house is worth?  That’s great news for you!  As long as I can pay cash or obtain financing on the home, no one cares if I pay too much for the house.  My ignorance results in a windfall to you.

Many employers overreach in drafting the terms of their non-compete agreements.  They assume that if a six-month restriction is good, a three-year restriction must be better.  Rather than using the least restrictive means possible, they get greedy and try to eliminate all types of competition.  Their greed leads to an unenforceable non-compete agreement.  Once your employees realize that the agreement is unenforceable, you have wasted your time and money in preparing the agreement.

Because a court ultimately may determine whether a non-compete agreement is enforceable, you need to change your strategy in drafting the agreement.

Let’s go back to the example about the sale of your house.  Assume that any contract we sign must be reviewed by an all-powerful board of realtors that will determine whether the price is fair.  If it is, the sale goes forward as agreed.  If the price is unfair, however, you have to give me the house for free.

How would you negotiate the purchase price if you were at risk of giving me the house for free?  What if I insisted on paying $200,000 more than the house was worth?  You undoubtedly would refuse to accept the unfair price (even though it would temporarily be more profitable for you), and refuse to sell for anything above the appraised value of the house.  The possibility of being required to give me the house for free is too great a risk.  You would want me to pay a fair price and nothing more.

If a third party is allowed to review the fairness of our transaction, our motivations are turned upside down.  You would want me to pay as little as possible.  I, on the other hand, would be motivated to excessively overpay for the house, gambling on the chance that I could get the house for free.

Draft your non-compete agreements with an eye toward having a judge determine whether they are reasonable.  Rather than seeking to get as great a restriction as possible, focus on the smallest restriction possible that adequately protects your business interests.  Seek the advice of competent legal counsel to determine the scope of an enforceable restriction in your jurisdiction.  Don’t overreach and risk the possibility of your employees competing without any restriction.

Make sure that your non-compete agreements are valid and enforceable, and your business will boom.

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