A non-compete agreement is a contract in which one party promises not to compete in business or trade with another party. Also referred to as "non-compete clause" or "covenant not to compete," this type of agreements is similar to other contracts and must abide by the standard contract formation requirements.
When Are Non-Compete Agreements Used?
Non-compete agreements frequently come up in the following contexts:
- Employment: An employer can prevent employees from offering their services to competing businesses.
- Sale of Business: A new owner of a recently purchase business may want to prevent the previous owner from engaging in the same business.
- Various Business Associations: When one of the business partners leaves a professional partnership to open his own practice, his partner(s) may want to limit the degree of competition.
How Would a Non-Compete Agreement Benefit Your Business?
Non-compete agreements can benefit your business in several ways. For example, they can:
- Prevent past employees from competing with your business by soliciting or luring away your company’s clientele as well as your current employees.
- Prevent your company’s sensitive business information as well as your clients’ confidential information from being disclosed to the competitors.
- Prevent loss of your business’ trade secrets.
Limitations on Anti-Compete Agreements
Not every non-compete agreement is enforceable. These agreements may not be legal when they unreasonably restrict free market competition or unreasonably limit a person’s ability to work.
Some states outlaw anti-compete agreements. For example, there is a California ban on covenants not to compete.
What Is Required for an Enforceable Non-Compete Agreement?
Anti-compete agreements must be reasonable in scope. For example, the agreement should only last for a reasonable, specified time period, such as one or two years following the termination of employment. Also, there should be geographic limits and specific limits concerning the areas of business that are included.
No agreement should be written to sound like its purpose is to punish employees. Instead, the agreement should be written so that its purpose is to prevent the disclosure of sensitive information.
As an Employee, Can I Negotiate the Terms of the Agreement?
If you are an employee who is required to sign a non-compete agreement as a condition of employment, you may be able to negotiate a less limiting agreement. For example:
If you’re already employed and your current employer asks you to sign a non-compete agreement, you may try to negotiate receiving some benefit (i.e., a raise or a promotion) in return. The drawback is that receiving a benefit in return for signing a non-compete agreement makes it harder to challenge the agreement down the road.
Try to limit the situations where the non-compete agreement is triggered.
When to Seek Legal Help?
If you encounter questions or problems concerning non-compete agreements, you should consult a qualified employment lawyer or a non-compete employment lawyer.