What You Really Need to Know About Covenants Not to Compete
The use of covenants not to compete is becoming increasingly common, perhaps most notably in the sales and technology arenas. Unlike certain other states, there is no explicit statute in Connecticut that addresses the enforceability of such covenants. Employers need to understand, however, that while covenants not to compete are not currently prohibited by Connecticut law, they are also not generally favored by courts. Connecticut employers that wish to use such agreements to protect their business interests face the challenge of crafting as wide-ranging a restriction as possible while being careful not to make it so broad as to be unenforceable.
General contract requirements
To be enforceable, covenants not to compete must, at a minimum, meet the requirements of any other type of contract. Perhaps most importantly, such agreements must be supported by sufficient consideration. Generally, a covenant not to compete that is signed as a condition of hire is supported by sufficient consideration. Covenants signed after hire, however, raise more questions. Continued employment, without more, generally will not constitute sufficient consideration. However, continued employment along with a promise of something additional may be sufficient. For example, one Connecticut court held that a promise to pay more money in the future constituted a sufficient change in terms and conditions of employment such that a noncompete agreement could be enforced.
In addition to general contract principles, courts interpreting Connecticut law will consider five factors in determining whether a restrictive covenant is reasonable and therefore enforceable. These factors are:
- the length of time the restriction operates
- the geographical area covered
- the fairness of the protection accorded to the employer
- the extent of the restraint on the employee's opportunity to pursue his occupation
- the extent of interference with the public's interest
All five factors must be considered and found to be reasonable in order for a restrictive covenant to be enforceable. Time and geographical restrictions, however, seem to be the major focus of most reviews. The Connecticut Supreme Court has indicated that time and geographical restrictions are to be reviewed in conjunction with one another. A restriction covering a large area might be reasonable if in effect for a short time, while one covering a small area may be enforceable for a longer time.
Whether a restriction is reasonable is a very fact specific inquiry and the outcome of litigation is not always predictable. A recent court decision, for example, upheld an international firm's agreement with its director of engineering and development that he would not work for any competitor in any geographical area for one year. A few years ago, however, a two-year restriction on working within a 75-mile radius of Fairfield was found to be unreasonable.
Courts may modify an otherwise unenforceable covenant so as to make it reasonable. This is called "blue penciling" the covenant. One Connecticut court has said that "blue penciling" may occur as long as the parties to the agreement have evidenced an intent to make its terms severable. In order to make such intentions clear, parties may specifically state that if a court finds any of the terms of the agreement to be unenforceable, the remaining terms will continue to be valid.
For the past several years, there have been attempts by Connecticut legislators to limit, or even eliminate altogether, an employer's ability to enter into a non-compete agreement with its employees. Although no such measures have been passed to date, the issue is on the agenda again for the next legislative session.