A non-compete covenant, non-compete clause, or covenant not to compete is a provision that prevents a former employee from working for a competitor or opening a competing business for a specified period after leaving the company.
These provisions are found in employment contracts and can protect companies’:
- Sensitive business information – client lists, demographic information, business practices, upcoming products, marketing plans, etc.
- Confidential information – trade secrets, employment operations, etc.
- Trademarks and copyrights
- Employee investment (the expense of specialized training for employees)
Most courts require a “legitimate business interest” for a non-compete covenant. The agreement must not simply punish the employee for leaving or aim to prevent normal competition. Non-compete agreements are common in the technology and sales industries, where protecting confidential information and customer relationships is key.
In order for a non-compete covenant to be enforced, the agreement must be reasonable. There are several criteria that should be present to make it easier for courts to enforce a covenant not to compete:
- Reasonable Time Restrictions: The period of time the employee must refrain from competing with their former employer must be reasonable. Reasonableness will vary depending on the industry. In manufacturing and marketing industries, courts have found two year restrictions reasonable. In technology-based industries, courts have held covenants of even one year unreasonable.
- Reasonable Geographic Scope: Most non-compete covenants will be limited to the area where the employee worked. National non-compete covenants may be considered reasonable for industries that operate worldwide. However, a state that disfavors non-compete covenants, like California, may refuse to enforce an out-of-state covenant.
- Narrow Class of Customers and Competitors: The more specific a covenant, the more likely it is to be upheld. For example, limiting the covenant to customers with whom the employee had close contact or positions with substantially similar duties increases the chances of the covenant being found reasonable.
- Adequate Consideration: In order to be reasonable, an employment contract with a non-compete clause must provide adequate consideration for the clause term. This means the employee must receive some form of compensation at some point in exchange for agreeing not to compete, either via promotion or raise during employment or compensatory pay upon departure from the company.
An experienced business attorney can help draft a covenant not to compete or negotiate the terms of the agreement. An attorney can also advise on your right to sue an employee for breaching a covenant not to compete.