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Are Non-compete Agreements enforceable if signed by employee after being hired?

Test time!  Is the following non-competition agreement enforceable?

“Frank, a Jimmy John’s franchisee, hired his nephew, Nick, to begin working at his Jimmy John’s franchise in Ohio.  Three months after Nick started working, Frank realized that Nick never returned the noncompete agreement he gave Nick during their initial discussions about the job.  The non-compete agreement states that Nick is prohibited from participating in another sub shop within 15 miles while employed and for two years following employment.

Frank has trusted Nick with recipes and procedures that are proprietary and trade secrets of Jimmy John’s, so Frank wants to be sure his entrepreneurial minded nephew doesn’t get any funny ideas about starting his own neighborhood sub shop.

When Frank approached Nick about signing the non-compete agreement, Nick said he forgot and promptly signed and returned the agreement to Nick.  Two months later, Nick quits to open up Nick’s Original Gourmet Subs a few blocks away.  It’s modern decor and authentic rocker vibe is attracting Frank’s customers away, and Frank’s sales drop 40%.   Frank sues Nick for breaching his non-compete agreement.  Who wins?

Hint:  The issue is whether an employee’s continued employment is sufficient consideration (is it enough benefit) for the employee to make the agreement enforceable.

The short answer is… it depends what state you are in.  In Ohio, it would be enforceable.  In Washington, South Carolina, Colorado and Minnesota, the non-compete agreement would not be enforceable because continued employment IS NOT sufficient consideration, courts require more benefit such as a pay raise.  In Illinois, the outcome is uncertain.  Illinois courts have held that continued employment for a “substantial period of time” will constitute sufficient consideration.  The length of time that the employee remains on the job, along with the manner in which the employment ends, are relevant factors for Illinois courts to consider when examining the validity of afterthought covenants.

In the above example, not only is Frank going to have a tough time stopping Nick, but Frank likely violated his franchise agreement which has it’s own set of ramifications.  So the lesson is don’t do casual hires!   Seemingly minor legal oversights can sink you.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.
8 comments
R Stevens
R Stevens

The US is certainly different in its application of non compete laws to the majority of the western world. I guess it has a lot to do with the strength of states rights. European law recently held that it was a human rights violation to enforce a non compete clause unless the person was paid normal salary for the full term of the clause and only with the workers full consent. This has something to do with taking away the ability to work and provide for a family. An interesting way of looking at the whole area of non compete clauses.

Ryan Knoll
Ryan Knoll

@R Stevens: In the USA, it too has a lot to do with fairness to a person's right to make a living. States vary on how much they want to allow a person freedom to continue his or her trade, and not be interfered with by past employers.

Jamie
Jamie

I agree with Jack.... Za you can work for me anytime. As far as 'non-compete' agreements I believe it depends on the state you operate in. I work for a franchise and some states we have better luck with 'non-compete' agreements.

David
David

Ryan I work in the franchise world and I can tell you this post is absolutely correct. We are headquartered and started in Colorado and obviously non-compete agreements are not enforceable at all. However, we do have all of our employees sign them no matter what state they are in. Even if the non-compete agreement it is not enforceable it still can be powerful in the employee's eyes. I would still recommend employers use them even if just as a deterrent.

Dom
Dom

so even after working at a business for three years and my boss found out I turned in an app at a different business and told me to sign it or get out? would that be enforcable?

Lucky
Lucky

David, You are running the risk that the entire agreement may be thrown out and potentially other issues by forcing an employee to sign an agreement you know to be unenforceable. I am not sure it is worth it.

Za
Za

Who would want to own a business with all these legal gotchas? My advice is to work for someone else and let them deal with the headaches and legal problems.

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