Topic:
EMPLOYMENT (GENERAL); BUSINESS (GENERAL); LABOR (GENERAL); CONTRACTS;
Location:
LABOR - LAW AND LEGISLATION;

OLR Research Report


January 22, 2007

 

2007-R-0112

STATE LAWS ON NON-COMPETITION CLAUSES

By: Christopher Reinhart, Senior Attorney

You asked for information on laws in other states that prohibit or limit the use of non-competition clauses in employment contracts.

SUMMARY

We surveyed statues on non-competition clauses in 15 states: California, Colorado, Delaware, Hawaii, Illinois, Maine, Massachusetts, Michigan, Montana, North Dakota, Oklahoma, Oregon, South Dakota, Texas, and Wisconsin. Of these states, six generally prohibit these clauses by statute but with specific exceptions that allow them for certain people in certain circumstances; four states have statutes prohibiting non-competition clauses for specific professions, such as doctors or broadcasters; and five states have statutes generally allowing non-competition clauses but with restrictions, such as requirements that they only apply for a reasonable time and scope.

The section below briefly describes the statutes in these states. If you would like more information about them or copies or the statutes, please let us know.

NON-COMPETITION CLAUSES GENERALLY PROHIBITED BUT WITH SPECIFIC EXCEPTIONS

California

A contract that restrains someone from engaging in a lawful profession, trade, or business is void with the following exceptions:

1. someone selling a business' goodwill or his entire ownership interest in a business, or an owner under certain other circumstances can agree to refrain from carrying on a similar business in a specified geographic area where the business sold, if the buyer carries on a like business there (this applies to a partnership, limited liability company (LLC), or corporation);

2. a partner dissolving or dissociating from a partnership can agree that he will not carry on a similar business in a specified geographic area where the partnership was transacted as long as another member or the partnership or someone getting title to it carries on a like business there;

3. a member, when dissolving or terminating his interest in a LLC, can agree that he will not carry on a similar business in a specified geographic area where the business has been transacted as long as another member or someone taking title to the business carries on a like business (Cal. Business and Professions Code 16600-16602.5).

Colorado

A covenant not to compete that restricts the right to compensation for skilled or unskilled labor for any employer is void. But this does not apply to:

1. contracts to buy a business or its assets,

2. contracts protecting trade secrets,

3. contracts that provide for recovering employee education and training expenses for an employee who served for less than two years, and

4. executive and management personnel and officers and employees who are their professional staff.

Employment, partnership, or corporate agreements between physicians that restrict the right to practice medicine are void, but they can include damages for terminating the agreement including damages related to competition (Colo. Rev. Stat. 8-2-113).

Hawaii

A contract in restraint of trade is illegal but the following restrictive covenants are valid if they are for a legitimate purpose, do not otherwise violate the law, and do not substantially lessen competition or tend to create a monopoly:

1. someone selling a business can agree not to compete within a reasonable area and for a reasonable time in connection with sale of the business,

2. partners can agree not to compete with the partnership in a reasonable area for a reasonable time on withdrawing from the partnership,

3. an employee can agree not to use trade secrets in competition with the employer after ending employment for a time reasonably necessary to protect the employer without imposing undue hardship on the employee (Haw. Rev. Stat. 480-4).

Montana

A contract that restrains someone from exercising a lawful profession, trade, or business is void except:

1. a seller of a business' goodwill can agree to refrain from carrying on a similar business in the city or county of the business's principal office and adjacent cities or counties if the buyer carries on a like business in that area, and

2. partners dissolving a partnership can agree that one or more of them will not carry on a similar business in the city or county of the business's principal office and adjacent cities or counties (Mont. Code 28-2-703 to -705).

North Dakota

A contract that restrains someone from exercising a lawful profession, trade, or business is void except:

1. a seller of a business' goodwill can agree to refrain from carrying on a similar business in specified county, city, or part of one of them if the buyer carries on a like business in that area, and

2. partners dissolving a partnership can agree that one or more of them will not carry on a similar business within the city (or a part of it) where the partnership transacted business (N.D. Code 9-08-06).

Oklahoma

A contract that restrains someone from exercising a lawful profession, trade, or business is void except:

1. a seller of a business' goodwill can agree to refrain from carrying on a similar business in a county and contiguous counties or city or part of one if the buyer carries on a like business there, and

2. partners, when dissolving the partnership, can agree that none of them will carry on a similar business in a county and contiguous counties or city or part of one.

If an employee agrees not to compete after the employment relationship terminates, he can engage in the same business but cannot directly solicit the sale of goods, services, or a combination of them from the former employer's established customers (Okla. Stat. tit. 15, 217-219a).

NON-COMPETITION CLAUSES PROHIBITED FOR A SPECIFIC PROFESSION

Delaware

Employment, partnership, or corporate agreements between physicians that restrict the right to practice medicine in a particular area are void, but they can include damages for terminating the agreement including damages related to competition (Del. Code tit. 6, 2707).

Illinois

A contract for broadcasting employees other than sales or management employees cannot prohibit employment in a specific geographic area for a specific period after ending employment. But this does not apply to a prohibition during the term of an employment contract or for an employee who breaches such a contract (820 ILCS 17/5 and 17/10).

Maine

For a broadcasting employee, a contract provision that requires refraining from employment in a specific geographic area for a specified time after the contract expires or employment ends without fault of the employee is presumed unreasonable (Me. Stat. Rev. tit. 26, 599)

Massachusetts

Employment, partnership, or corporate agreements with a physician that restrict the right to practice medicine in a particular area are void.

For a broadcasting employee, a contract provision is void if it requires refraining from employment in a specific geographic area for a specified time after (1) the contract expires, (2) employment ends by mutual agreement, or (3) termination by the employer (Mass. Gen. L. ch. 112 12x and ch. 149, 186).

NON-COMPETITION CLAUSES GENERALLY ALLOWED WITH CONDITIONS

Michigan

An agreement can protect an employer's reasonable competitive business interests and prohibit the employee from employment or business after terminating employment if it is reasonable in duration, geographic area, and type of employment or business. A court can limit an agreement to make it reasonable in light of the circumstances in which it was made (Mich. Stat. 445.774a).

Oregon

A non-competition agreement is void unless it is entered into on the employee's initial employment or bona fide advancement.

This does not apply to a bonus restriction agreement. These agreements (1) limit or restrain competition by the employee after employment terminates for a limited time, geographic area, and activity that is reasonable in relation to the services performed by the employee and (2) have a penalty of forfeiting profit sharing or bonus compensation not yet paid the employee. The employee's services must include substantial involvement in management, personal contact with customers, knowledge of customer requirements, or knowledge of trade secrets or proprietary information (Ore. Rev. Stat. 653.295).

South Dakota

An employee can agree (1) not to engage directly or indirectly in the same business or profession as the employer for up to two years from the termination of the agreement and (2) not to solicit the employer's existing customers within a county, town, or specified area for up to two years if the employer continues to carry on a like business there (S.D. Codified Laws 53-9-11).

Texas

A covenant not to compete is enforceable if it contains reasonable limits on the time, geographic area, and scope of activities to be restrained and imposes no greater restraint than necessary to protect goodwill or other business interests. Additional conditions apply to covenants with physicians. The law also provides details on the burden of proof and allows the court to reform an agreement (Texas Business and Commerce Code 15.51).

Wisconsin

An employee can agree to a covenant not to compete during or after employment within a specific territory and for a specific time if the restrictions are reasonably necessary to protect the employer (Wis. Stat. 103.465).

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