Non-Compete Agreement

What is a Non-Compete Agreement?

A Non-Compete Agreement is a useful document which many businesses use with their contractors, partners, employees 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.

If an employer wants to restrain an employee from competing with the employer, they should consider using a Non-Compete Agreement with Employee.

When is it appropriate to use a Non-Compete Agreement? When is it not?

Australian law imposes some restrictions on non-competitive conduct. There are laws against "anti competitive" conduct when it is pursued as a way to limit competition in the market (which is bad for consumers). However, there are many circumstances when it is completely appropriate for parties to reach an agreement not to compete.

For example, imagine a company ACME Pty Ltd is a renewable energy project developer, and it hires an independent contractor (DS Consulting Pty Ltd) to assist with business strategy. To protect its confidential methodologies and client relationships, ACME asks DS Consulting to sign a Non-Compete Agreement, preventing DS Consulting from working with direct competitors, or from approaching ACME's clients or staff, for six months after the consulting contract ends.

This kind of arrangement is likely to be legal because ACME and DS Consulting are not in direct competition and they each provide different kinds of services. In addition, the agreement is necessary to protect the parties' legitimate business interests, is reasonably limited in scope, and does not involve collusion between competitors to lessen market competition.

On the other hand, in some cases it may be illegal for two businesses to use a Non-Compete Agreement if it has the purpose or effect of restricting competition.

For example, if ACME Pty Ltd and another renewable energy project developer, Wayne Industries Pty Ltd, (which directly competes for clients and projects with ACME), agree not to compete for clients in certain areas, then this could be illegal. This kind of agreement could restrict competition in that region, could amount to cartel conduct and breach Australian competition law under the Competition and Consumer Act 2010. This is discussed further under the heading "What is not allowed in a Non-Compete Agreement?" below.

If in doubt, seek legal advice.

What is the difference between a Non-Compete Agreement and a Non-Disclosure Agreement?

A Non-Disclosure Agreement is also often called an NDA or a Confidentiality Agreement. A Non-Compete Agreement and a Non-Disclosure Agreement have some similarities, but they are quite different documents. While both documents impose some restrictions on the parties, they deal with different subject matter.

• A Confidentiality Agreement or Non-Disclosure Agreement deals with restrictions on the sharing of information. For example, a startup business might ask a potential investor to sign an NDA before sharing its business plan and financial information.
• A Non-Compete Agreement deals with restrictions on competing with another business. For example, a business that engages a consultant to help deliver some services may ask them to sign a Non-Compete Agreement, preventing them from working with direct competitors for a period of time after the consultancy ends.

For further information, see our legal guide What's the Difference Between a Non-Compete Agreement and a Non-Disclosure Agreement?

What is the difference between a Non-Compete Agreement and a non-compete clause in a standard contract?

Many standard contracts do include clauses dealing with competition and restraint of trade. For example, these sorts of clauses are included in an Employment Agreement, Joint Venture Agreement, and a Business Sale Agreement.

However, a Non-Compete Agreement goes into more detail than those standard contracts do, and provides a clear standalone record of the parties' agreement regarding competition. This also helps to emphasise the importance of these obligations, and reduce the risk of ambiguity or misunderstanding.

Is it mandatory to have a Non-Compete Agreement?

No, but if a business thinks there is a risk of unfair competition, then a Non-Compete Agreement is a critical tool to help manage this risk.

What is not allowed in a Non-Compete Agreement?

It is important that a Non-Compete Agreement does not breach Australia's laws regarding anti competitive or cartel conduct.

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).

A Non-Compete Agreement should not include terms that amount to things such as price fixing, output restrictions, market sharing, bid rigging, exclusive dealing or various other actions which substantially 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.

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

What can be the duration of a Non-Compete Agreement?

A Non-Compete Agreement should state how long the restrictions apply for. However, there is no mandated timeframe for a Non-Compete Agreement. It just needs to be reasonable. A Non-Compete Agreement can be struck down by a court if it is found to be unreasonably restrictive.

For example, if a company (ACME Pty Ltd) hires a business consultant to provide advice about business strategy and how to adapt their business to improve performance, and the consultant then immediately begins working with a direct competitor (Wayne Industries Pty Ltd) located in the same town, this might have a significant impact on ACME's business. Therefore, this could justify a non-compete restriction for a short period of time after the original consultancy ends. On the other hand, if 6 months later, the consultant starts working with another business (Duff Pty Ltd) which only operates in a different state (where the ACME has no clients or business operations), then this is unlikely to impact ACME's business, so a restriction against this would probably be unreasonable.

Non-Compete Agreements that are unreasonable are unlikely to be 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. Typical timeframes for Non-Compete Agreements range from a few months to a few years. Or the term could be related to the duration of the relationship between the parties (for example, for the duration of an employment relationship, and then for another one year after that).

What are the prerequisites of a Non-Compete Agreement?

Before signing a Non-Compete Agreement, each party should take the time to review it and make sure they understand it. They should also have the opportunity to obtain legal advice if required.

What has to be done once a Non-Compete Agreement is ready?

Once a Non-Compete Agreement is ready, both parties should review it and then sign it. They should both keep a signed copy for their own records.

What must a Non-Compete Agreement contain?

A typical Non-Compete Agreement should contain 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. This could be monetary compensation, or something else (such as access to trade secrets, an investment opportunity, or an opportunity to purchase a business).

A Non-Compete Agreement may also include 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.

Which laws are applicable to a Non-Compete Agreement?

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 relevant business (such as trade secrets or business goodwill). The courts will not uphold a restraint clause that restricts competition per se, or which unreasonably restricts competition.

The Competition and Consumer Act 2010 (Cth) also contains provisions dealing with anti-competitive or cartel conduct. The Australian Competition and Consumer Commission provides further information.

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