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Covenants Not To Compete: For Everyone At The Firm Except Attorneys?

By Debra L. Raskin and Stephanie A. Darigan
May 31, 2005

A covenant not to compete is an increasingly popular device employers use to bind employees not to work for, or as, a direct competitor. The restriction is usually limited in time and to a particular geographical area. Such covenants are most often found in employment contracts, but they can also be a separate document, signed by the employee at hiring, during employment, or upon leaving. However, in many states, a covenant not to compete cannot stand alone as a binding agreement, but must be ancillary to an employment or other type of contract that provides some benefit to the employee. See, eg, Hopper v. All Pet Animal Clinic, 861 P.2d 531 (Wyo. 1996). Covenants not to compete in contracts for the sale of a business are more readily enforced than those in employment agreements because of the relative absence of public policy concerns, detailed below. While covenants not to compete may be used by employers in certain court-delineated circumstances, ethical rules specifically bar the application of such restrictive covenants to attorneys.

Employers favor covenants not to compete as a means of guarding trade secrets and other proprietary business information that employees obtain on the job, and also as a way to protect their market share by barring former employees from entering into a competitive business. The primary rationale against the enforcement of such covenants is the judiciary's disinclination to impede employees from earning a living in their chosen field. Covenants not to compete limit an employee's ability to obtain work and also restrain competition and trade in general. As such, covenants not to compete are disfavored by courts and narrowly construed. See, eg, Duneland Emergency Physician's Medical Group v. Brunk, 723 N.E.2d 963 (Ind. Ct. App. 2000). Although courts can be reluctant to enforce covenants not to compete, employers may at times bank on the legal fees attendant to defending against such claims to deter employees from competitive activity. See, eg, Eve Tahmincioglu, “Compete with Caution against Past Employer: Legal Challenges May Face the Unwary,” N.Y. Times, Thursday, March 31, 2005, at C7.

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