A non-compete agreement is a type of legal contract. A non-compete agreement is also called a non-compete clause, a non-compete covenant, or a covenant not to compete. Typically, a non-compete agreement involves an employee and an employer.
In a non-compete agreement, an employee usually agrees that they will not use their services or knowledge to compete against their employer over future business customers, clients or opportunities. An employee may be bound by a non-compete agreement even after they have stopped working for their employer.
In order for a non-compete agreement to be legally binding between the employee and the employer, the agreement must meet the typical requirements for forming a contract. An employee may dispute a non-compete agreement in a civil lawsuit if the agreement does not contain these contract requirements, or if the agreement is unreasonable.
When are Non-Compete Agreements Used?
Non-compete agreements are frequently used in business settings. Some specific situations where non-compete agreements are used include:
- When an employer wants to prevent their employees from offering their services to a competing business;
- When a person buys a new business and they want to prevent the business seller from attempting to continue the business under a new business name; and
- When one business partner leaves a professional partnership to start their own business, and their former business partner wants to prevent them from taking clients or customers.
How Could a Non-Compete Agreement Protect My Business?
A non-compete agreement may be used to protect your business against a damaged reputation and the loss of clients, customers, and profits.
A non-compete agreement can help protect your business in several ways by:
- Preventing former employees from competing with your business by soliciting or luring away your company’s clients, customers, and current employees;
- Preventing your company’s sensitive business secrets, confidential ideas, marketing studies, and financial information from being leaked or used by current or former employees;
- Protecting your clients’ confidential information, such as names and addresses, from being disclosed to your company’s competitors;
- Protecting your company’s trade secrets including trademarks and patents; and
- Protecting your company’s reputation.
How Do I Know If a Non-Compete Agreement Is Enforceable?
In some situations, an employee may not be required to follow a non-compete agreement. These situations vary by state. Most states require that non-compete agreements be reasonable in terms of purpose and scope in order to be legal. The scope of a non-compete agreement relates to its time period and geographic area.
To be legal, a non-compete agreement should only be effective for a reasonable and specific period of time, such as one or two years following the end of employment. Non-compete agreements also should not be used by a company as a way to punish former employees who have left the company.
Typically, an unreasonable non-compete agreement may prevent an employee’s right or ability to work for a new employer, especially if the non-compete agreement covers a wide geographic area or uses vague words to describe the types of services and actions that are restricted.
Another example of an unreasonable non-compete agreement is one that tries to restrict free market competition or growth. This type of unreasonable non-compete agreement is typically thought to be bad for public interests and will usually be invalid.
In some states, non-compete agreements are illegal. For example, as of 2019, there is a California ban on covenants not to compete and non-compete agreements are also banned in Oklahoma, Montana, and North Dakota. In Hawaii, some technology companies are prohibited by the state from requiring employees to sign non-compete agreements. /
As an Employee, Can I Negotiate the Terms of a Non-Compete Agreement?
You may be able to negotiate the terms of a non-compete agreement if signing the agreement is required in order to be hired by an employer. In these cases, you may be able to negotiate the terms of the agreement including limiting the scope and the length of the agreement.
Sometimes, if an employee’s existing employer requires that they sign a non-compete agreement, they may be able to negotiate a raise or a promotion in exchange for signing the agreement. In these situations, it may be difficult for the employee who received a raise or promotion to argue that the non-compete agreement was illegal or invalid in any future employer disputes.
Do I Need a Lawyer for Help with My Non-Compete Agreement?
If you are a business owner, you may be able to draft a non-compete agreement for your employees on your own. If you’re an employee you may be able to negotiate or challenge a non-compete agreement without a lawyer.
Both of these situations require complex steps and considerations for both business owners and employees. For the best outcome, you should consider consulting with a non-compete employment lawyer who can help you understand the agreement before you sign.