Businesses have used non-compete agreements for years to limit a former employer’s ability to seek work from a competitor. Many states have enacted statutes that provide limited validity for non-compete agreements, and courts in other states have struggled to develop guidelines that balance the competing needs of employers and employees.
Hawaii courts have worked to develop standards for non-compete agreements based upon statutes governing competition and the use of confidential information.
A brief history
In 1976, the Hawaii Supreme Court ruled that an employer may impose a non-compete term on an employee if the term is “reasonable” and “ancillary to a legitimate purpose.” This formulation remained the law until 2022, when the Supreme Court struck down a non-compete clause because the main purpose of the clause was to prevent employers from working for competitors. The court held that protecting the former employer from competition, by itself, was not a legitimate purpose of a non-compete.
In January 2023, the Federal Trade Commission proposed a nationwide ban on non-compete agreements to ameliorate their anti-competitive effect. Most observers thought that the FTC would move swiftly to effectuate the proposed ban on non-competes, but thus far, little more has happened.
In Hawaii, at the moment, the validity of non-compete agreements is uncertain. If the agreement is reasonable in duration, scope, and purposes, a court is likely to enforce it. If the agreement pushes the boundaries of reasonableness too far, a court is very unlikely to enforce the agreement. Examples of unreasonable terms include lifetime duration and nationwide application. Because Hawaii is an island state, any clause that applies on the mainland must be supported by a clear and appropriate purpose.