Non-Compete Agreement

What is a non-compete agreement?

A non-compete agreement is a document used to protect employers from 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 most often used in highly competitive industries, such as technology development, sales, and marketing. Common situations that would require the use of a non-compete agreement include the following:

• An individual selling their business and agreeing not to 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 aiming to ensure that if the employee leaves, they do not use their access to business secrets to start a competing company

For more information about the scope of non-compete agreements, please refer to the guide Important Considerations before Asking an Employee to Sign a Non-Compete Agreement.

What is the difference between a non-compete agreement and a non-disclosure agreement?

Though both documents are used in employment relationships, they constrain employees in different ways.

A non-compete agreement prevents an employee from leaving their employer to start a competing business in the same industry and same geographic location. It is not about the disclosure of information but instead about the initiation of competition.

A non-disclosure agreement stops an employee from sharing specific business secrets and practices outside the company.

Is it mandatory to have a non-compete agreement?

No, it is not mandatory to have a non-compete agreement. Employers can decide to allow their former employees and business collaborators to set up competing businesses once they leave the company.

However, many employers choose to use non-compete agreements to lessen competition and ensure that employees do not use what they learned working for them to eventually take away business from them.

What is "solicitation"?

Solicitation is the practice of a former employee contacting the employer's clients and customers in an attempt to get their business. This can also entail former-employees trying to contact current employees and inducing them to leave the employer to work for them instead.

What is not allowed in a non-compete agreement?

Generally, non-compete agreements with very broad geographical boundaries or restrictions beyond where the employer's business actually operates are not reasonable and, therefore, not legally enforceable.

For example, a business that operates strictly in one town would have trouble imposing a nationwide non-compete agreement. The legality of restrictions in the agreement will be determined on a case by case basis in court.

What can be the duration of a non-compete agreement?

Courts are typically unwilling to enforce agreements judged to be excessively long. What is considered excessively long varies from state to state, but a 36 month, or 3 year, maximum is usually a good rule of thumb.

What should be done once the non-compete agreement is finished?

Once it has been written, this non-compete agreement must be hand signed and dated by both the non-competing party and the party who is being protected from competition. After they have both signed and dated the document, they should each keep a copy of the document for their records in case of future dispute. No further notarization or registration is necessary for this document to take effect and be binding on the parties.

What must a non-compete agreement include?

A valid non-compete agreement must contain at least the following mandatory clauses:

• Identifying information: The non-compete agreement should include information describing the employer and the employee, including their names and addresses.
• Length of agreement: The non-compete agreement includes the length of time that it will be in force and the employee will be prohibited from competing. This is a maximum of 36 months, or 3 years.
• Geographic area: The non-compete agreement includes the geographic area where the employee is prohibited from competing with the employer. This could be a particular distance (e.g., 100 miles from the company headquarters), a town, city, state, or the entire country. 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.
• Compensation: The non-compete agreement outlines what the employee will get in exchange for signing this agreement and abiding by its terms. This compensation can range from a job offer to monetary compensation to a promotion to an alternative form of compensation such as stock options.

In addition to the above mandatory clauses, the non-compete agreement may include the following additional information:

• Solicitation prohibition: The non-compete agreement may include a clause that prevents the employee from contacting the employer's clients, customers, or current employees once they have left the company.
• Activities description: The non-compete agreement can describe the specific activities that the employee may not engage in. For example, an associate attorney at a firm might be responsible for both the family law litigation and trusts and estates practice at the firm. The attorney and the firm could agree, when parting ways, that the attorney may still create trusts and estates on their own, but they may not engage in family law litigation in competition with the firm's family law practice.

Which laws are applicable to a non-compete agreement?

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 enforceability of non-compete agreements in each state, please refer to the guide What is the Enforceability of Non-Competes in my State.

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