October 30th, 2020
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October 30th, 2020
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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 just called "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.
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 with employment. 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.
First and foremost, Non-Competes are designed specifically to protect against unfair competition. Usually, the business that is requiring someone else to sign the Non-Compete often either has something very specific to protect or perhaps live in an area where there already is a lot of competition or even sometimes lives in an area where there is no competition and they want to be sure they keep it that way. Most often, in Non-Competes, former employees that leave a business are restricted from opening their own within certain limits and sometimes are also restricted from working with competitors. A Non-Compete doesn't just have to be used for employees, though, it can be used in any situation where a business needs to protect against competition and another party is willing to sign it in exchange for something.
Non-Competes can stand on their own as their own full agreement or they can be included as part of an Employment Agreement. 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.
Final takeaway: Non-Competes are designed, first and foremost, to ensure the business owner stays protected from unfair competition.
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 go blab the protected information to anyone and they also won't be able to use it for their own business.
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. NDAs do need to be somewhat limited in their scope of time, but the scope of time for NDAs is generally longer than a Non-Compete. For example, it's common to see NDAs limiting disclosure for up to three years, whereas with a Non-Compete, generally a year is about the limit for maintaining the reasonability of the restrictions.
Because of this major difference, the way these documents are enforced in courts is also highly variable. Non-Competes are often scrutinized a lot, with courts refusing to enforce them much of the time in certain states. NDAs, on the other hand, are often enforced unless it can be proven that the information at issue was learned from a source other than the business that required the NDA.
Final takeaway: Non-Competes must be narrowly tailored. NDAs work best when they are broad.
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.
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: NDAs can be mutual or one-way. Non-Competes are 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 can further the goals of an NDA, but in a very distinct way.
Non-Competes often contain non-solicitation clauses, which say that the employee cannot solicit clients, customers, and other employees of the business.
NDAs on the other hand can contain non-circumvention clauses. Sometimes, in a joint venture situation, Non-Circumvention Agreements are also used, which ensure that the parties' exchange of confidential information will only be used for a business venture between them. In other words, one party cannot circumvent the other party and use the information for another business deal with someone else.
Although there is a standard practice for where to put these clauses, in reality, all of these different clauses can be found in the same agreement or they can all be in separate agreements, it just depends on exactly what the business is looking to do.
Final takeaway: A well-reasoned, considered approach, taking into account many different legal tools, is best for protecting your business.
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 will protect you, however, so being clear on the differences is a good idea. For any questions or for help drafting these documents, you can contact a licensed attorney in your state.
About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.