Effect of the Internet on Geographic Restrictions in Non-Compete Agreements

Effect of the Internet on Geographic Restrictions in Non-Compete Agreements

Non-compete agreements constitute a venerable and important part of how businesses legitimately protect their confidential information and customer relationships.  Of course, courts view such provisions with skepticism.  They recognize them as the last vestige of indentured servitude, and will toss them at the first opportunity if they appear unreasonable, or not capable of redaction down to some reasonable restriction.

Enter the Internet.  How has the globalizing nature of the Internet affected the validity and enforcement of geographic restrictions in non-compete agreements?

In general, courts do not like to enforce non-compete agreements because the agreements restrict competition.  Traditionally, courts upheld non-compete agreements that restricted an employee from working within a designated geographic area, such as an area within fifty or one-hundred miles of the employer.  However, today's technology has made the economy much more global, and as such, a mileage limitation no longer applies to certain companies.   Specifically, companies that sell products and services solely online require national, and sometimes international geographic scopes in order to adequately protect the companies' legitimate business interests.

Although the internet presents new issues in determining the reasonableness of a geographic restriction, courts have applied the public policy considerations behind non-compete laws to find a solution. Surprisingly, courts have had few opportunities to address the particular issue of how the internet affects the reasonableness of a geographic scope within a non-compete provision. 

So far, courts have only had the opportunity to address the globalizing effect of the internet in the context of an online business. It remains unclear how a court will interpret a non-compete agreement for a company that merely has a presence online. Although non-compete agreements naturally involve a fact-intensive inquiry, the courts have reached three general conclusions regarding geographic restrictions in the online business context.

First, a non-compete agreement that has an inverse relationship between the scope of the geographic restriction and the temporal restriction will likely survive an objection. When employers significantly limit the time restriction, courts permit a broader geographic scope.

Second, determining the reasonableness of a geographic restriction necessarily depends on the characteristics of the other components of the non-compete agreement, including the employer's legitimate business interests, the nature of the particular business industry, and the time restriction. The courts have held a nationwide or non-existent geographic restriction as unreasonable when the non-compete extended beyond protecting an employer's legitimate business interest. However, when the employer's legitimate business interest required a broader temporal and geographic scope, the courts have held a nationwide or global geographic restriction as reasonable.

Third, and closely related, limiting the type of medium and specific job duties an employer may not perform allows for a broader geographic restriction. A non-compete that restricts an employee from selling a particular product online, but permits the employee to sell other products online or the same product in a retail store sufficiently limits the agreement to allow a nationwide geographic restriction.

Old non-compete documents may not reflect the new realities created by the Internet and social media.  Wise employers will periodically review and update their standard employment agreements and non-compete provisions.

For more information, contact David Carr at (317) 236-5840 or david.carr@icemiller.com or any member of Ice Miller's Labor and Employment Group.

 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.