Non-Compete Agreement

A Non-Compete Agreement is a useful document which many businesses use with their employees, contractors, partners, or other individuals with access to their sensitive business information. The business may use the Non-Compete Agreement to prevent the other party from soliciting the business's clients, recruiting the business's staff, or using the business's sensitive information to open a competing business. Non-Compete Agreements are used most often in highly competitive industries, such as technology development, sales, and marketing.

Common situations requiring the use of a Non-Compete Agreement include the following:

• An individual selling their business and agreeing to not compete with the new business owner for a period of time
• Business partners terminating a business relationship
• A company and a contractor or consultant ending their business relationship and the company wanting to ensure that the consultant does not use their former access to business secrets to help the company's competitors
• An employee being hired to work at a company and the company wanting to ensure that if the employee leaves, they do not use their access to business secrets to start a competing company

The Agreement is generally entered into at the end of a business relationship, but can also be created at the start of a business relationship (for example, as a condition of employment). Many standard contracts do include clauses dealing with competition and restraint of trade. For example, these sorts of clauses are included in our Employment Agreement, our Remote Work Agreement, and our Business Sale Agreement. However, this Non-Compete Agreement goes into more detail than those standard contracts do. It also helps to make it clear that the business takes these issues very seriously. Therefore, even if a business has a standard contract that deals with competition and restraint of trade, they often choose to also use a Non-Compete Agreement.

Some Non-Compete Agreements may breach Australian competition law

Under the Competition and Consumer Act 2010 (Cth) ("CCA") if several businesses that operate in the same market come to some kind of agreement about how they will do business, there is a risk that this agreement could constitute conduct which is considered "anti competitive" or "cartel conduct".

The CCA also provides some exemptions which mean that "anti competitive" arrangements might be permitted in some circumstances (for example, between employers and employees).

The CCA deals with various anti competitive practices and cartel conduct in Australia. This includes such things as price fixing, output restrictions, market sharing, bid rigging, exclusive dealing and various other actions and agreements in which competing businesses may engage, in order to reduce competition in their market. The CCA prohibits much of this conduct, and (if an exemption does not apply) then the CCA may impose significant penalties on businesses that engage in the relevant conduct.

"Price fixing", for example, may occur if the parties are making some kind of secret agreement to fix their prices (ie to keep them artificially high) rather than competing openly against each other.

"Output restrictions" may occur when competitors agree to prevent, restrict or limit the volume or type of particular goods or services available to consumers. This may be intended to reduce the available supply of particular goods or services, in order to increase the price of those goods or services on the market.

"Market sharing" may occur when competitors agree to divide or allocate customers, suppliers, or territories among themselves rather than allowing competitive market forces to work. Market sharing restricts competition, forces prices up, and reduces choice in relation to price and quality for consumers and other businesses.

"Bid rigging", which may also be referred to as "collusive tendering" may occur when two or more competitors agree they will not compete genuinely with each other for tenders. Instead, they choose to allow one of the parties to "win" the tender. They may take turns to be the "winner" by agreeing the manner in which they submit tenders, including by some competitors agreeing not to tender. Bid rigging leads to uncompetitive tender processes that can result in organisations paying higher prices for goods or services, or receiving lower quality goods or services.

"Exclusive dealing" refers generally to some kind of exclusive dealing between the parties, for the purpose, or with the effect or likely effect, of substantially lessening competition (whether competition between the parties, or competition more generally).

When we refer to "lessening competition", we are talking generally about practices in which businesses might engage, such as the making or giving effect to a contract, arrangement, or understanding, or some kind of concerted practice, for the purpose, or with the effect or likely effect, of substantially lessening competition. This might relate to the lessening of competition between the parties, or competition more generally. Competition in a market helps to increase the supply of goods or services in the market, and therefore reduces the price. If the parties do something which has the effect of "substantially lessening competition", this may increase the price.

If the parties have any concerns at all about whether or not they are going to be affected by these laws, they should strongly consider obtaining legal advice.

This Agreement is only designed for use among parties which are not engaging in anti competitive or cartel conduct.

Further information is available on the website of the Australian Competition and Consumer Commission.

How to use this document

This Agreement outlines the duration of the non-competition, the geographic location where the non-competing party must avoid competition, and the covered subjects, industries, and activities that the non-competing party must not engage in while the Agreement is in force.

The Non-Compete Agreement contains the following essential elements:

• Parties involved -- The names and addresses of both the non-competing party (the party being asked to not compete) and the protected party (the party asking that competition not occur).
• Duration of Agreement -- The period of time during which the non-competing party must not compete with the protected party. To be enforceable, this time period must be reasonable given each of the party's business interests. Courts are generally hesitant to limit a non-competing party's access to economic activity, so the shorter the time period, the more likely it will be enforced in court.
• Geographic range of Agreement -- The geographic area in which the non-competing party is prohibited from engaging in competition with the protected party. To be enforceable, this geographic area must be limited to the area where the protected party operates and has its market. The geographic area must be as narrow as possible to reasonably meet the goals of shielding the protected party from competition.
• Specific activities and subjects included in non-competition -- A thorough description of the activities and industries the non-competing party must not engage in under this Agreement. The prohibited activities should be limited to those that are essential to the protected party's business practices.
• Compensation -- Form and/or amount of compensation the non-competing party will receive in exchange for entering into the Agreement. To be enforceable, the non-competing party must receive some form of compensation, also known as consideration, in exchange for entering into the Agreement. This compensation can range from a job offer to monetary compensation to a promotion to an alternative form of compensation such as stock options.

This Agreement also offers optional clauses that would prohibit the non-competing party from behaviour such as soliciting the protected party's customers and clients or inducing current employees of the protected party to leave their jobs and come work for the non-competing party.

As with all other parts of the non-competition, non-compete agreements are not always enforceable under Australian law. A restraint will only be enforceable if it imposes no more restrictions than are necessary for the protection of the other party's legitimate business interests. Therefore, these clauses must be limited in time and scope so as to be enforceable as reasonable by a court of law in case of dispute.

Applicable law

Non-Compete Agreements are subject to the common law doctrine of restraint of trade.

This means that the agreement must be directed at protecting specific interests of the employer (such as trade secrets or business goodwill). The courts will not uphold a restraint clause that restricts competition per se, or unduly interferes with an employee's right to sell his or her own labour.

Importantly, if this agreement is being used with an employee, then it should be remembered that post-employment restraints are presumed to be invalid and unenforceable. It is up to the employer to prove that the restraint is necessary to protect a legitimate business interest.

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