Non-Compete Clauses: Yes, They Can Be Enforced

It seems to be a common misconception that non-compete agreements are not enforceable in New Mexico. When we talk about non-compete agreements, the first question to ask is: To whom is the non-compete being applied? If a vendor or other business with access to your trade secret information, such as your customer lists, you can certainly require a non-compete on such vendor or other business especially as it relates to using your trade secret or confidential information to compete against your business. If the non-compete is being applied to an employee, then it must be reasonable.

Reasonableness is the Key Factor

To be enforceable in New Mexico, a non-compete agreement must be reasonable in all respects. The geographic area in which a person is not allowed to compete must be reasonable. The time period during which a person is not allowed to compete must be reasonable. The activity in which a person is not allowed to engage must be reasonable. The consideration given in exchange for a person’s agreement not to compete must be reasonable.

Unfortunately, there is no hard and fast rule for what “reasonable” means. As a general rule, the less specialized a position is, the more lenient the terms of the non-compete agreement must be to be considered reasonable. For example, a global company that is one of only a few companies that supply a particular and very specialized product could conceivably prohibit its key personnel from working anywhere in the world for any of the few other companies that supply that product. On the other hand, it may be unreasonable to prohibit a part-time cashier in a retail store from working in any other retail store, even one located next door.

To make a reasonable non-compete agreement, a business should carefully tailor its non-compete agreements to prohibit competition that actually hurts the business. First, what particular work does the employee perform for the company that, if the employee performed the same work for a competitor would harm the company? A non-compete agreement should restrict the employee only from engaging in that particular work for a competitor, and the non-compete agreement should certainly specify that using confidential or trade secret information is prohibited.

How small can the restrictive area be? If your business relies on its convenient location to attract customers, the restrictive area in the non-compete agreement might be unreasonable if it exceeds the business’s neighborhood.

How long should the restrictive time duration be? If your customers are unlikely to follow a departing employee to another business after that employee has not been in the business for a few months, a restrictive time period of one year might be unreasonable.

Fair Consideration is Also Important

Like all agreements, non-compete agreements need to have consideration, which is a fancy legal term for some sort of compensation for the restriction of a non-compete. However, unlike other types of agreements, the courts will look into the sufficiency of the consideration for someone’s promise not to compete — that is, was the compensation paid for the restriction reasonable? If the seller of a business promises not to compete with the buyer, the courts will assume that the seller was sufficiently compensated for his promise with the payment for his business. No such assumption applies when the person promising not to compete is an employee. Offering an existing employee continued at-will employment in exchange for a promise not to compete is probably not adequate consideration. On the other hand, if an initial offer of employment is contingent on a non-compete agreement, the offer of employment might be adequate consideration.

Again, the key to having an enforceable non-compete agreement is to make it as least restrictive as absolutely needed to protect your business. There is usually no need to have an agreement that prevents a person from earning a living in his or her field, and the courts probably won’t enforce such an agreement anyway. Remember, the goal of a non-compete agreement is to protect your business from losing its customers – not to punish an employee who has the audacity to leave your company’s employ.

Business Law Southwest, LLC (BLSW). Business Law That Makes Business Sense. A Slingshot company.

About tmortimer:

Tim Mortimer is an attorney and partner of Slingshot, LLC, the parent company of Business Law Southwest, LLC, and Law 4 Small Business, P.C. He is licensed to practice law in New Mexico and Arizona, and focuses on transactional work, contracts, mergers and acquisitions, commercial real estate and more.

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