Non-Competes in a Virtual World

I knew an accountant who sold her business. As part of the deal, she could not start or work for another accounting firm within roughly thirty miles. This is a standard clause in many exits and business sales. The new owners don’t want direct competition that would steal away the clients they just purchased.

The courts have typically used geography as a balance. Preventing her from working as an accountant anywhere in the country would have been too onerous. After decades of working as an accountant she doesn’t have a lot of other ready-made career options. On the other hand, they can’t let her join the firm across the street from her old office because clients would follow her, and those clients are a significant part of the value they purchased. A reasonable geographic range strikes the right balance.

But what does that mean today? During covid many people moved across the country and worked virtually.

When non-competes were written, the standard was that most employees worked at the corporate location. Does the geography restriction apply to the location where the employee worked or where the employee’s former company is located? Presumably a reasonable interpretation is that it’s tied to the location of the company, believing that the company’s customers are local. Most small services businesses, e.g., accountants, marketing agencies, caterers, tend to have local clients. But as in person meetings are less of a requirement, then a marketer in Ohio could leave her current company and join a marketing agency in Nebraska which could compete against the same Ohio clients as her old company.

What about a company that is virtual to begin with? Their legal address may be in a place like Delaware for tax purposes, even though no employee lives there. The company has no physical office. What is the basis for its geography?

An alternative might be to list specific competitors. That may work for oligopolies, where an industry is dominated by a few major players. It’s not going to work for the average SMB, such as a small law firm, which may have dozens of competitors.

Companies, employees, and the courts are going to need to rethink the geographic requirements, and likely non-competes in general, in our new work-anywhere world.