Non-Compete Agreement

A Non-Compete Agreement is a document used to protect employers from partners, employees, contractors, and other individuals with access to their business secrets and practices using that access to leave the company to start their own competing business in the same industry. 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 as a condition of employment. In exchange for entering into the Agreement, the non-competing party must receive some form of compensation, known as consideration. Consideration can be either a promise of employment or monetary compensation to be paid from the protected party to the non-competing party. For more information about the scope of Non-Compete Agreements, please see the guide Important Considerations before Asking an Employee to Sign a Non-Compete Agreement.

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 behavior 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, 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 the subject of state law and are interpreted and enforced differently from state to state. Some states allow broader Non-Compete Agreements while other states will only enforce Agreements with significant durational and geographical limitations. Notably, California courts will only enforce Non-Compete Agreements in situations involving the sale of a business from one party to another. State law should be consulted to be sure that the Agreement will be fully enforceable in that state. For more information about the enforcability of Non-Compete Agreements in each state, please see the guide What is the Enforceability of Non-Competes in my State.

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