What happens if you violate a non-compete agreement?
What are the possible damages for breach of non-compete agreement?
What’s important to know?
We will look at the validity of a non-compete agreement, the breach of its terms, how to mitigate damages, cease and desist letters, injunctions, non-compete lawsuits, look at examples and frequently asked questions.
Be sure to read the entire article as there are super important aspects about breaking a non-compete agreement that we will share with you.
Are you ready?
Let’s get started!
Table of Contents
What does it mean to violate a non-compete agreement?
To understand what it means to violate a non-compete agreement, let’s look at a few important concepts to set the stage for properly understanding the consequences of a breach of contract.
Let’s look at:
- What is a non-compete agreement?
- How is a non-compete agreement valid?
- Breach of non-compete obligations
What is a non-compete agreement
A non-compete agreement is a contract signed between contractual parties where one’s goal is to protect legitimate business interests.
The objective of the non-compete agreement is to restrict a party’s conduct in the future within the same profession or industry such as:
- Not working for a competitor
- Prohibiting the collaboration with a competitor
- Preventing a person from starting a competing business
If the terms of the non-compete agreement are violated, the non-breaching party may exercise legal recourse to cease and prohibit the restricted competitive behaviours.
How is a non-compete agreement valid
Many jurisdictions have laws, statutes or legal tests (such as the reasonableness test) governing non-compete agreements, their validity and enforceability.
Typically, a non-compete agreement can be enforced when it provides for clear and reasonable scope, duration and geographic application.
The non-compete provision will be enforced to protect a legitimate business interest such as confidential information, trade secrets, proprietary information, secret design or formula and so on.
Breach of a non-compete obligations
If you signed a non-compete agreement, violating it may have important legal consequences.
However, non-compete obligations, non-compete clauses and non-compete agreements are not seen favourably by the courts and interpreted strictly.
A non-compete obligation is enforceable when it complies with the laws, is reasonable and to protect legitimate interests
A party looking to enforce non-compete provisions must have an enforceable legal right and legitimate interests to protect in court.
For example, legitimate business interests can be considered as follows:
When non-compete provisions are considered too broad, unreasonable or invalid resulting in the obligation being unenforceable.
Recourses for breach a non-compete agreement
So you have a non-compete agreement and you have violated its terms or believe may be in violation, what happens next?
Perhaps you are looking to enforce a non-compete agreement and you are wondering what can be done.
Let’s go over:
- The non-breaching party’s obligation to mitigate damages
- Sending a cease and desist letter to the breaching party
- Claiming monetary damages
- Seeking an injunctive order against the breaching party
- Seeking injunctive orders against third parties
- Filing a tortious interference action against a third party
Mitigate damages
The non-breaching party in a non-compete agreement should take reasonable steps to prevent damages or mitigate them if there are reasons to believe the other party has violated its terms.
For example:
An employer looking to prevent damages from the possibility of a former employee competing can do the following:
(1) Right before the termination of the employment relationship, remind the employee of his or her non-compete obligations
(2) During an exit interview, ask the employee if he or she has secured a job with a competitor or will start a competing business
(3) Notify customers that the employee has left the organization and share the new contact information
(4) If a competitor has hired the former employee, send a legal notice to the competitor indicating that the employee is violating the terms of a non-compete agreement
(5) In some cases, if the competitor has not yet hired the employee, a notice can be sent to indicate that the hiring of the former employee can result in a violation of a non-compete agreement
Cease and desist letter
When a party discovers that another may have breached the terms of a non-compete agreement, to put the breaching party on notice, a cease and desist letter should be sent.
Typically, a cease and desist letter is the first line of attack to enforce a non-compete agreement
In a cease and desist letter, generally sent by lawyers, the non-breaching party will summarize the contractual obligations of the breaching party, outline the reasons why there may be a breach, refer to case laws or statutes and demand the cessation of the prohibited activities.
It is customary to specify that monetary damages and injunctive relief orders may be sought against the breaching party if the violation of the non-compete terms does not stop.
Monetary damages
A valid and enforceable non-compete agreement can lead to the breaching party having to pay monetary damages to the non-breaching party.
As a legal remedy, the non-breaching party may demand monetary damages
Generally, the non-breaching party will look to get compensatory damages for lost profits due to the illegal competitive acts of the breaching party.
Compensatory damages
Compensatory damages can represent a small award of damages but can also represent important sums of money depending on the circumstances of the breach.
Typically, compensatory damages are sought for loss of profits.
Punitive damages
If the breaching party acted in bad faith, in a deliberate, calculated and strategic way of violating the non-compete provision, the court may also award punitive damages.
This is not a likely scenario but if the actions of the breaching party were malicious, you can expect exposure to punitive damages to be higher.
Liquidated damages
Another type of damage the non-breaching party may seek in court is liquidated damages.
Liquidated damages must be expressly provided for in the contract and have a reasonable formula to calculate the potential losses of a party in the event of a breach.
These damages are enforceable against the breaching party only and cannot be enforced against third parties collaborating with the breaching party in the damaging competitive actions.
A monetary award of damages will compensate the non-breaching party for potential damages but will not be effective in preventing the breaching party from ceasing the competitive behaviour.
That’s when an injunction may be considered.
Injunctive relief
In addition to monetary damages that the breaching party may have to pay, a party may demand that the courts issue an injunctive relief order or an injunction against the breaching party to cease performing any action that will constitute a further violation of the non-compete obligation.
Injunctive reliefs are the most common type of relief sought for the breach of non-compete agreements.
An injunction is the most common type of relief sought in court
The objective is to have the breaching party stop competing or acting in violation of the non-compete agreement.
For example:
An employee signs a non-compete agreement with her employer agreeing not to work for competitors.
A few years later, she leaves her job and goes to work for the competitor assuming the same functions.
The former employer may ask for monetary damages against the former employee and take an injunction against her from continuing to work for the same employer.
The non-breaching party has the option of either filing a lawsuit to get monetary damages as a remedy to the injuries suffered, seeking an injunctive order to have the person refrain from violating the non-compete agreement or both.
Injunctive relief against a third party
If the breaching party is working in close collaboration with a third party in violating a non-compete obligation, the non-breaching party may also file an injunction against the third party.
The objective is to have the third party cease supporting or providing collaboration to the breaching party in violating a non-compete provision.
This is often the case in employment-related non-compete agreements
For example:
If a former employee was hired by a competitor, the competitor is a third-party to the non-compete agreement but is the one benefiting from the violation of the breaching party’s non-compete obligations.
A former employer may file a lawsuit against the former employee and the competitor in order to have the breaching party and the third-party cease violating the non-compete agreement.
Tortious interference action against a third party
If the third-party is intentionally, knowingly and deliberately collaborating with the breaching party violating a non-compete, the non-breaching party may file a lawsuit for tortious interference action against the third-party.
Tortious interference actions are legal recourses provided in common law to prevent someone from intentionally damaging someone else’s business relationships or contracts with a third party.
Violating non-compete agreements FAQ
The legal assessment of the violation of non-compete agreements is highly factual in nature.
The scope and wording of the non-compete agreement is also very important for the court to interpret.
Let’s look at some of the most common questions relating to what happens if you break a non-compete agreement.
Can I work for a competitor if I signed a non-compete agreement?
The wording of the non-compete agreement is very important to determine for which competitor you cannot work for.
The courts will enforce non-compete agreements when they are reasonable and protect a legitimate business interest.
The goal is not to prevent someone from earning a living or pursuing his or her career somewhere else.
For example:
If the non-compete agreement isolates one specific competitor for legitimate reasons and for a reasonable timeframe, then it is likely that the courts will enforce this agreement.
Conversely:
If the non-compete agreement prevents from working for “any” competitor, the chances are high that the court will not enforce such a provision.
What happens if you violate a non-compete agreement?
If you have signed a valid and binding contract, in the best-case scenario, if you breach your non-compete agreement, nothing may happen.
In other words, the other party (non-breaching party) may not consider the damage or harm significant enough to want to pursue the matter in any way.
In the worst-case scenario, you will end up with a non-compete lawsuit.
That will be the case when the injury caused to the other party is significant enough that it will justify spending money to prevent further damages.
In between the two spectrums, you may get a cease and desist letters or reach an out-of-court settlement.
How to win a non-compete case?
To win a non-compete case, you must demonstrate the following:
Can a non-compete keep you from working?
The spirit of a non-compete agreement or obligation is to protect a party’s legitimate business interest.
As such, if a non-compete provision prevents you from working in your industry or in your profession, that will be unenforceable in law.
The courts will void non-compete obligations that are excessively broad, prevent a person from earning a living or is unreasonable in duration, scope and geography.
What can void a non-compete?
Non-compete agreements, clauses, provisions or terms must be drafted carefully and in compliance with the applicable laws for the court to enforce it.
Typically, you can attack the validity of a non-compete by attacking any of the following aspects:
- Disputing the unreasonableness and broadness of the scope
- Disputing the excessiveness of the duration
- Disputing the unreasonableness of the territorial scope
For example:
If you are considered to be in violation of a non-compete agreement letter scoped to prevent you from working for “any” company or prohibiting you from working in your industry or starting any business, that will likely not be enforced by the court and will be voidable.
If you are considered in violation of a non-compete agreement intended to prevent you from competing for 5 years, that may be voidable in court.
If a party alleges that you are breaking a non-compete agreement in such a way that you are unable to work for any company in the world, that will certainly be voidable in court.
Which states ban non-compete agreements?
In the United States, California, Montana, North Dakota and Oklahoma totally ban non-compete agreements for employees.
They may allow non-compete agreements in very limited situations.
On the other hand, in all other states, non-compete agreements are recognized, valid and enforceable.
How well do non-competes hold up in court?
The courts interpret non-compete clauses strictly.
This means that your non-compete agreement should be well-drafted, in compliance with the state laws and intended to protect a legitimate business interest.
Here are some signs that your non-compete may not hold up in court:
How to get out of a non-compete agreement?
If you sign a non-compete agreement, you can get out of it in the following ways:
- Negotiate with the other party to terminate the non-compete agreement
- Negotiate with the other party to amend the non-compete agreement
- See if you can get a specific discharge or release from the other party
If you do not get a release, obtain a discharge or amend the terms of your non-compete agreement, you are bound by the terms of the contract.
The non-compete agreement may or may not be enforceable but you will not know until the matter gets litigated in court, a potentially costly venture.
If you get fired, does a non-compete still apply?
Although this must be answered based on the specifics of the applicable laws, in general, the non-compete obligation does not depend on the reason why your employment contract was terminated.
Consider the non-compete obligation as an independent or standalone obligation effective during your employment and for a reasonable period of time after.
In cases where a person is fired, it may be more likely that the person will go work for a competitor and share information out of frustration or anger.
