U.S. And E.U. Non-Competition Agreements Compared And Contrasted

With employers operating, and employees working, in the global economy, knowing whether non-competition agreements will be enforced in other jurisdictions is essential for both those seeking to enforce and those likely to be subject to enforcement action. Unfortunately, there is much variation not only in the United States itself, with different states adopting different stances on whether non-competition agreements may be enforced, but also across the European Union. This article will highlight some of those differences, both in the United States and in the European Union, and suggest how employers may prepare to meet the challenges of enforcing non-competition agreements in and across various jurisdictions. 1

The United States

Range of the different schools of thought in the United States regarding the extent of the enforceability of non-competition agreements can be clearly seen from a brief review of the divergent approaches taken by the courts in Delaware, California, and Virginia.

Delaware's stance on the enforceability of non-competition agreements is consistent with that taken by the majority of states in the United States. Delaware's courts will closely scrutinize a non-competition agreement as restrictive of trade, but will generally enforce it if it is part of a valid agreement that is supported by consideration, is reasonable in time and scope, and serves to protect the employer's legitimate economic interests, 2 which generally include the employer's confidential information and goodwill developed through customer relationships. 3 Furthermore, Delaware courts have adopted the reasonable alteration approach, which means that if the non-competition agreement is overbroad and unenforceable as written, rather than finding the non-competition agreement to be completely unenforceable, the court may choose to enforce the non-competition agreement to the extent that it is reasonable to do so. 4

California, on the other hand, has adopted a very different approach to non-competition agreements. The general rule in California is that non-competition agreements are unenforceable. California's Business and Professions Code Section 16600 declares that, with a few exceptions, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." The general rationale for this prohibition on non-competition agreements is that "[t] he interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers." 5 However, there are general exceptions to the prohibition where non-competition agreements are connected to the sale of a business or partnership, dissolution of a partnership, or dissociation of a partner from a partnership. Further, California's courts have created an exception for agreements that are necessary to protect the employer's trade secrets. 6

Somewhere in between the divergent positions taken by Delaware and California lies Virginia. Virginia courts consider restrictive covenants to be restraints on trade that are to be carefully examined and strictly construed. 7 Virginia courts have long disfavored the inclusion of non-competition agreements in employment contracts and construe them directly in favor of the employee. 8 However, generally, a Virginia court will enforce a non-competition agreement if an employer shows that the restraint, including the time and geographic restrictions, is no greater than necessary to protect some legitimate business interest; is not unduly harsh and oppressive in curtailing the employee's legitimate efforts to earn a livelihood; and is reasonable from the standpoint of a sound public policy. 9 Legitimate business interests include trade secrets or other confidential information, customer contacts, and knowledge of methods of operation. 10 A Virginia court will not modify a non-competition agreement that it determines is unenforceable as drafted. As a practical matter, this means that non-competition agreements that apply to employees in Virginia, as well as in other states that follow a similar stance, must be drafted with extreme care.

European Union

A similar difference in approach is evident in the various Member States of the European Union, as can clearly be seen from a brief review of the different approaches taken by the United Kingdom, France, Germany, and Italy.

United Kingdom

In the United Kingdom, non-competition agreements are commonly included in senior employees' employment contracts. As a preliminary comment, if an employer wishes to enforce such an agreement post-termination, it should ensure that it terminates the employee's employment in accordance with the employment contract; if the employer breaches the contract, for example by not giving the employee the contractually required notice of termination, the non-competition agreement will fall away and be unenforceable.

Non-competition agreements are prima facie against public policy and therefore unenforceable unless found to be reasonable in the interests of the contracting parties and of the public. There are two stages in assessing reasonableness. Firstly, the non-competition agreement must be drafted to protect only the legitimate proprietary interests of the ex-employer. 11 Legitimate interests include customer/client/supplier connections, trade secrets (or other information of a confidential nature), and the stability of the workforce. Secondly, the scope of the restraint must go no further than is necessary to give adequate protection to the ex-employer's legitimate interests. 12 "Scope" refers to geographical area, activities/subject-matter, and duration. Of all the post-termination restraints placed on ex-employees, non-competition agreements are assumed to be the most onerous and are therefore scrutinized most carefully by the courts. Accordingly, they have generally been harder to enforce than other post-termination restrictions, although the courts have upheld non-competition agreements on the basis that a restriction on solicitation would be difficult to police and therefore might not effectively protect the employer's business interests. 13

Non-competition agreement covenants were historically drafted by reference to a radius or geographical area from the employer's premises but are nowadays more usually drafted to cover a...