Delaware Business Lawyer Blog

If you’re a Delaware employer and you’re considering hiring a new employee who has a non-compete agreement with his previous employer, it’s advisable to consult with a Delaware business attorney before you offer him the job. Why? Because in Delaware, you run the risk of being sued by the previous employer for tortious interference with the employee’s contractual relationship with his former employer.

The Delaware courts will view your conduct as a substantial factor in causing a breach of an employee’s non-compete agreement, and they will rule against you if:

(1) you know about a non-compete agreement that your prospective employee signed with his former employer,

(2) you know that he can’t perform work for you without violating the terms of his non-compete agreement, and

(3) you offer him employment so that you can engage in competition with his previous employer.

In my next article, I’ll discuss the remedy that the courts in Delaware can grant to the previous employer.

In Delaware, the courts will enforce a non-compete agreement if it (1) meets the general requirements of a contract, (2) is of reasonable scope geographically, (3) is of reasonable duration, and (4) protects the legitimate business interests of the employer without placing unreasonable restrictions on the employee.

What are the general requirements of a contract? In a recent Delaware court case, an employee who was being sued for violating his non-compete agreement argued that he was forced to sign the agreement and didn’t receive any additional compensation in exchange. In effect, his argument was a lack of consideration, which is one the essential requirements of a contract. The court ruled against the employee, stating that in Delaware, employment or continued employment can serve as consideration for an at-will employee’s agreement to a non-compete restriction.

Whether a restriction is reasonable in terms of the territory covered or the duration of the restriction is based on the facts of each particular case. In Delaware, a non-compete agreement that lasts 2 years or less is usually held to be reasonable. As to whether the geographic limit is reasonable depends on what’s necessary to protect the employer’s legitimate interests. The reasonableness of a geographic area isn’t necessarily determined by its physical distance but rather the area in which the employer has an interest which needs to be protected.

The term “legitimate business interests” has to do with the employer’s good will and relationships with employees and customers.

In deciding whether the restriction on the employee is unreasonable, one of the questions to be looked at is whether the restrictive covenant would prevent the employee from earning a living or continuing to pursue the same career.

From time to time, Delaware business owners are faced with the decision whether to file a lawsuit against a former employee who appears to be violating a non-compete clause in their employment contract. A typical non-compete clause might say: “Employee agrees that during his employment and for a period of one year thereafter, he will not directly or indirectly engage in the same business as Employer nor will he in any way be connected with (whether as owner, employee, partner, stockholder, director, member, or otherwise) any company which competes with the business of Employer within a 50 mile radius of Wilmington, Delaware.”

Having been involved in these cases on behalf of both employers and employees, I can tell you that the courts here in Delaware generally base their decisions on 2 major questions: (1) is the non-compete agreement enforceable, and (2) if it is enforceable, has the non-compete agreement been breached?

If the court finds that there has been a breach of the non-compete agreement, another issue has to do with the remedy. In other words, will the court order the former employee to stop competing, or will the court simply award money damages to the former employer?

In my next article, I’ll address the first question: is the non-compete agreement enforceable?

Employers in Delaware and in other parts of the country sometimes want their employees to sign a covenant not to compete providing protection to the employer after the employee leaves the company. Here are some of the frequently asked questions about restrictive covenants.

1. If I don’t use a written employment contract, can I still have a new employee sign a covenant not to compete?

ANSWER: Yes. A restrictive covenant does not have to be in an employment contract. It can be a separate document that covers the various issues relating to an employee’s future employment after he leaves your company.

2. I’ve recently started a policy of requiring new employees to sign a covenant not to compete. But what about employees who’ve been with our company for years? Can they also be forced to sign a restrictive covenant?

ANSWER: Yes. Unless there’s an employment contract that provides otherwise, employees in Delaware are considered “at-will” employees. As a result, the employee’s continued employment can be conditioned on him signing a covenant not to compete. If he refuses, you can terminate his employment.

3. I’ve heard that a covenant not to compete has to be reasonable in terms of the number of years it applies and the geographical area it covers. What’s considered reasonable?

ANSWER: Although this question is answered by the courts on a case by case basis, it’s generally accepted in Delaware that a 2-year period is reasonable. The scope of the restrictive covenant is another mater entirely. Although you might think it’s a number of miles from the employer’s location, the distance is not always what matters. Instead, the focus is on the area the employer has a legitimate interest in protecting. For example, where does its business extend to? Where are its customers located?

4. Can a restrictive covenant prohibit an employee who leaves my company from trying to hire my employees?

ANSWER: Yes. After you’ve trained an employee, you have a legitimate interest in keeping him. And you would be harmed if a former employee raided your company and lured your employees away from you.

5. I’m interested in hiring an individual, but I’ve found out that he signed a restrictive covenant with his former employer. Do I need to be concerned about that?

ANSWER: These days, when an employee violates the terms of his restrictive covenant, it's not unusual for the former employer to file a lawsuit not only against the employee, but also against the new employer for what’s known as “tortious interference.” This will be covered in a future article.