October 13, 2020
By: Colin A. Walker
A common and important provision in many executive employment agreements is a non-compete agreement and/or a non-solicitation agreement (also known as restrictive covenants). In most states, there are limits on the enforceability of non-compete agreements. The company usually needs a good reason (over and above normal contract law) to enforce a non-compete agreement. For example, in Colorado, non-compete agreements are void except:
- Contracts for the purchase and sale of a business or assets of a business;
- Contracts for the protection of trade secrets;
- Contracts for recovery of training expenses within the first two years of employment;
- Contracts with executive or management personnel and professional staff to executive or management personnel.
Laws differ from state-to-state, but most allow non-compete agreements to protect trade secrets and where the employee has some special relationship with the company, its customers, or other important aspects of the business. Most C-Level executives have access to trade secrets, business plans and strategies, R&D, or have a special relationship with the company’s business. As such, in most states, non-compete agreements with C-Level executives will be enforceable if they are carefully drafted.
Non-compete agreements must be reasonable in geographic scope and the time period of the restriction. Nationwide and even worldwide restrictions are possible if the business is nationwide or worldwide, but the company may have difficulty convincing a court that such a broad restriction is reasonable. Overreaching can result in a court refusing to enforce the agreement.
In an attempt to avoid problems with enforcement, many non-compete agreements provide that a court shall revise an excessive restriction to make it enforceable, known as “blue-penciling.” However, in some states (like Colorado), blue-penciling is discretionary and it is common for courts to refuse to revise the restriction and simply refuse to enforce it. In some states, the law provides that a court cannot blue-pencil a non-compete. Therefore, the restriction should be no more than the business reasonably needs to protect its legitimate interests.
Of course, C-Level executives will want to limit the scope of the restriction as much as possible and, in light of the strict standards of non-compete law, have significant leverage. Executives should consider requesting that the restrictive period be co-extensive with severance pay. A C-Level executive could also consider limiting the definition competition to reduce the scope of the restriction.