27th January 2021
27th January 2021
Among business owners, there is often some confusion as to the difference between Non-Compete Agreements (often just called "Non-Competes") and Non-Disclosure Agreements (often also called "Confidentiality Agreements" or "NDAs"). Although these two documents can both be essential for a business, they are quite different. Making sure you know the difference between the two will help ensure your business needs are properly covered when the time comes to have these documents signed.
In this guide, we'll go over the primary differences between a Non-Compete and an NDA, as well as talk a little bit about how they are similar. Before we get started, let's first go over exactly what each of these documents is.
Please be advised nothing in this document constitutes legal advice and everything here should be taken as informational only.
A Non-Compete is a document in which a person or business asks the subject of the Non-Compete, often an employee or potential employee, not to compete with the business in one of several ways. Generally, Non-Competes will restrict the activities of the employee after they leave the business, including by making sure the former employee can not open a competing business within a certain geographic zone for a certain period of time. Sometimes, Non-Competes will go so far as to say the former employee can not work with direct competitors of the employer, in any way.
While Non-Competes are most often used in the context of employment, they may be useful in some other circumstances as well, such as in partnerships, business sales or subcontracting situations. However, it is important to note that under Australian law, in some contexts, an agreement between two parties to refrain from competing with each other, could amount to illegal cartel conduct.
In contrast to a Non-Compete, an NDA is a document in which a person or business asks the subject of the NDA not to share confidential information that the person or business shared with them. This can be used in a variety of different situations but is often used in connection with employment, or when several businesses are discussing the prospect of working together (for example, when they are considering entering a Joint Venture Agreement together). NDAs can also be signed at the start of a contemplated joint business venture, when two parties are sharing information about their business and they want to be sure that information is protected, even if the joint venture never happens.
There are a number of differences between a Non-Compete and an NDA. We'll discuss some of the key differences below.
First and foremost, Non-Competes are designed specifically to protect against unfair competition. Often, Non-Competes are used to restrict former employees from opening their own competing business, or from working with competitors (within a certain time period and/or a certain geographical area). Non-Competes may also be used in the case of business sales, to prevent the vendor of the business from opening a competing business as soon as they have received the purchaser's money. There are a number of other situations where Non-Competes may also be useful.
The main purpose of the Non-Compete is solely to prevent unfair competition. There can be other clauses included in the agreement itself, but the main one will always be to attempt to restrict competition against the business that drafted the Non-Compete.
Warning - 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 you have any concerns at all about whether or not you are going to be affected by these laws, you should strongly consider obtaining legal advice before signing any Non-Compete Agreement.
Further information is available on the website of the Australian Competition and Consumer Commission.
Final takeaway: Non-Competes are designed, first and foremost, to ensure the business owner stays protected from unfair competition. The business owner should make sure their Non-Compete does not breach Australia's competition laws.
NDAs, in contrast to Non-Competes, are designed for a different purpose: to protect confidential business information. The confidential information can be in many forms: customer and client lists, trade secrets, intellectual property, finance strategy, marketing strategy, and many other types of information. Usually, NDAs will provide a limitation on both disclosing the protected information and using the protected information. In other words, the person that signed the NDA won't be able to disclose the protected information to anyone and they also won't be able to use it for their own business. They will only be able to use it for the specific purpose described in the NDA (often, for the purpose of their employment, or for the purpose of considering a business proposal).
Final takeaway: NDAs are designed, first and foremost, to keep business secrets secret.
One of the biggest differences is how tailored the two documents need to be in their scope. Non-Competes are generally required to be narrowly tailored: in other words, the party drafting the Non-Compete needs to put a reasonable time limit on it, as well as a reasonable geographic limitation, and the activities that count as "competition" should also be narrowly defined.
In contrast, NDAs are often very broad in their very nature. Usually, a business drafting an NDA wants to protect as much of their information as possible. Information that is already public can't be protected in an NDA, but besides that, the business can define their "confidential information" as broadly as they feel necessary.
If a court finds, for example, that a Non-Compete between an employer and employee goes further than is necessary to protect the employer's reasonable business interests, then the court may refuse to uphold the Non-Compete.
This is not usually the case for NDAs, which may be enforceable even if they contain broad restrictions.
Final takeaway: Non-Competes may be unenforceable if they are too restrictive. NDAs can be quite restrictive.
NDAs can be signed as a one-way agreement or, as often happens, as a two-way agreement. In a one-way NDA, one party is agreeing not to disclose or use the confidential information of another party. One-way NDAs are most often found in employment situations. In a two-way NDA, also called a mutual NDA, both parties are agreeing not to disclose or use each other's confidential information. This is very common in the business world at the start of a joint venture.
Our NDA template can be used to prepare a one-way or a two-way agreement.
In contrast, Non-Competes are almost always one-way agreements. One party will be requiring the other party not to compete. In practice, it would be very difficult to ask two parties not to compete with each other at the same time, but also, in reality, it's just not normally done. The most commonplace to see a Non-Compete is at the start of an employment relationship, as described above. Therefore, usually, it's just the employer seeking to protect their business from unfair competition, with the employee signing in exchange for the job, or a raise, or a new position.
Final takeaway: It is common for NDAs to be mutual or one-way. Non-Competes are usually only one-way.
Non-Competes and NDAs are very different documents, but a Non-Compete can be an additional tool for a business owner that is trying to protect against the disclosure of confidential information. Often, these documents are either signed together, or they are contained within the same agreement. If a business owner is worried about the disclosure and use of confidential information that they wish to protect through an NDA, it's likely that same business owner will also be worried about unfair competition from an employee who may have learned a lot while they were working for the business. Therefore, a Non-Compete can be an additional protective tool for a business owner to protect the information, but the goal of the documents is always, as discussed in this guide, very different.
Final takeaway: Non-Competes and NDAs serve different purposes, but often work hand in hand.
A number of our templates, such as our Employment Agreement, our Service Agreement, our Partnership Agreement and our Business Sale Agreement have options to include clauses dealing with competition and confidentiality. In other words, they deal with the same matters that are dealt with in NDAs and Non-Compete Agreements.
This is convenient as it means that the parties can just sign one document, and it will deal with all of these issues at once. It avoids the risk of one of the documents being forgotten or overlooked, when the parties are dealing with piles of paperwork and multiple pages to sign.
However, these documents only include general confidentiality clauses which may not provide as much protection as a standalone Non-Compete or NDA does. In addition, the simple act of being presented with a separate Non-Compete and/or NDA can help to signify to the other party that these are serious matters, and can ensure that the other party is aware of their obligations in relation to these matters.
In addition, even if you have dealt with competition and confidentiality in another document (for example, in an Employment Agreement) in some (fairly rare) circumstances, if there is some kind of issue with that document (for example, if you do something to "repudiate" it) then you may find that you are not protected by the competition and confidentiality clauses within it. Whereas if you had a standalone Non-Compete and NDA, they could remain in effect, regardless of what happens to the Employment Agreement.
"Repudiation" of a contract effectively means acting in a way that indicates you are no longer willing or able to comply with the contract, and this may give the other party the freedom to pull out of the contract themselves.
Final takeaway: It can be more convenient to include non-compete clauses and confidentiality clauses in general contracts (such as Employment Agreements). However, dealing with these matters in standalone documents may provide additional protection.
Non-Compete Agreements and Non-Disclosure Agreements, though different, can both be part of an effective strategy to protect your business. It's important to know exactly how these documents operate and how they may fit with your business. If in doubt, seek legal advice.