Non-compete and non-solicitation clauses in U.S. employment contracts

A non-compete is a clause that restricts an employee or contracting party from engaging in a competing business for a certain period. A non-solicitation clause, by contrast, does not prohibit competitive activity itself; it restricts approaching or soliciting existing customers or employees.

In U.S. contract practice, the purposes of these clauses are clearly distinguished.

• Non-Compete: restricts competitive activity itself
• Non-Solicitation: protects customer and workforce relationships
• NDA (Non-Disclosure Agreement): protects trade secrets and information
• IP Assignment: clarifies ownership of work product and intellectual property

In other words, the legal assessment differs depending on whether the clause restricts a particular individual's choice of occupation itself or protects the company's information and relationships. Because the United States tends to view restrictions on an individual's freedom to choose an occupation with caution, non-competes receive relatively strict scrutiny.

Non-compete and non-solicitation clauses are judged under state law, not federal law. As a result, the same contract language can be assessed differently depending on which state's law applies.

Looking only at the general trends:

• California: a very restrictive approach that in principle does not enforce non-compete clauses
• Texas: enforced if certain requirements are met, but the protected interest and scope must be reasonable
• Illinois: considers compensation, the nature of the job and the scope of the restriction as a whole
• New York: enforced on a limited basis where the purpose of protecting trade secrets or customer relationships is clear

There have recently been policy efforts at the federal level to restrict non-compete clauses as well, but so far the state-law-based structure remains in place. The policy direction itself, however, shows a trend toward interpreting non-compete clauses more restrictively.

For this reason, where a company has staff in several states or where remote work is involved, using a single standard contract as is can itself become a risk.

Restrictive covenants against changing jobs are also widely used in Korea, and courts assess their validity by weighing the need for protection against the employee's freedom to choose an occupation. In practice, even when the period or scope is somewhat broad, courts often limit it to a reasonable scope and give it partial effect.

In the United States, however, the approach is different.

Some states narrow an overbroad clause and enforce it, but in others the entire clause may be held void. In other words, a clause written broadly to strengthen protection can end up providing no protection at all.

Because of this difference, the Korean-style approach of writing it broadly and narrowing it later does not necessarily work in the United States. It is important to design the clause from the outset to fit the standards of the applicable state law.

In recent years, policy discussions in the United States aimed at limiting the scope of non-compete clauses have continued. The Federal Trade Commission (FTC) pursued a rule broadly restricting non-compete clauses, but following court rulings it is not currently in effect.

• Even so, this trend shows a clear direction. That is,
• clauses restricting competition itself are being reviewed more and more strictly,

while restrictions centered on protecting trade secrets or customer relationships are moving toward being more readily enforced.

In practice as well, the use of non-competes is declining, and protection structures centered on non-solicitation clauses and NDAs are becoming more common.

Disputes over non-competes are often not seen as a problem when the contract is signed and first become real only after the employee leaves.

The patterns that come up repeatedly in practice are as follows.

(1) When the duration and geographic scope are excessive

When a clause prohibits competition for a long period or across a wide area after the employee leaves, courts sometimes view it as an excessive restriction and refuse to enforce it.

(2) When the business interest to be protected is unclear

The mere purpose of preventing competition is not enough; there must be a specific interest to protect, such as trade secrets or customer relationships.

(3) When the restriction does not match the employee's actual work

When the same non-compete clause is applied even to employees who have no sales role or customer contact, the need for the restriction is often not recognized.

(4) When problems arise belatedly after the contract ends

In many cases there is no problem when the employee leaves, but a dispute arises later when the employee moves to a competitor, and only then does the enforceability of the clause become an issue for the first time.

With non-compete and non-solicitation clauses, the structure matters more than the wording itself.

In practice, the following points need to be reviewed together.

• Whether the business interest to be protected is clear
• Whether the duration, geographic area and scope of work are reasonable
• Whether the restriction matches the employee's actual work
• Whether the enforceability standards of the applicable state law are met
• Whether the contract terms match how the business actually operates

In particular, if the company does not actually run a system for managing trade secrets or protecting customer relationships, the need for protection may be judged weak after the fact.

A non-compete clause is not a mechanism that automatically provides protection simply because it is included in the contract. In the United States, what matters more than the restriction on competition itself is whether that restriction is within a reasonable scope and based on a legitimate business need.

Also, in recent U.S. practice, rather than using a non-compete on its own, it is common to design it as part of an overall protection structure together with an NDA, IP Assignment and Non-Solicitation clauses. The approach is shifting away from broadly restricting competition itself and toward managing risk with a focus on protecting trade secrets and customer relationships.

Restrictions on changing jobs are an important legal issue in both Korea and the United States, but there are significant differences in how they are enforced and the standards used to judge them. Understanding these structural differences and designing the contract from the outset to fit each state's standards is key to preventing actual disputes and genuinely achieving the purpose of the contract.

Related U.S. practices: Employment & Labor