What are Non-Competes?
Non-Competition Agreement: What Is It?
By definition, a non-competition agreement is a contract between two parties whereby one party essentially agrees to a restriction from competing with the other party—either for a specific period of time or within a specific area. For instance, let’s say that you are an accountant living and working in Chicago, Illinois. Your friend has a software company that creates software designed to help accountants prepare their clients’ tax returns. At some point, you decide to leave the accounting firm where you work and come on board at your friend’s software company. As part of a non-competition agreement, your friend might choose to restrict you from working for a different accountant in Chicago for a period of six months after leaving his company. Or perhaps he would restrict your ability to work for any Chicago-area accountant; either way, the purpose of the agreement is to protect against unfair competition.
Non-competition agreements are most common in the healthcare, information technology, and manufacturing industries . For example, in the field of healthcare, perhaps a cardiologist agrees to restrict his ability to work for another medical practice, or medical corporation, within a certain number of miles from his place of business. Setting aside the specialized language that is sometimes used in these agreements, most non-competition agreements are similar in that they place a restriction on an employee’s ability to work for other companies. Most non-competition agreements contain the following basic components:
Most often, it is the employer who brings the action against the employee. This makes sense because the employer has the most to lose if its former employee works for a competitor. However, the agreement can ultimately affect both employer and employee. Non-competition agreements are often enforceable up to one year. Ideally, just before the agreement’s term is set to expire, the employer may be able to find a suitable replacement, thus diminishing concerns about competition.
Essential Components of a Non-Compete
A non-competition agreement should generally contain sufficient information regarding the following:
Duration or Length of Time The Agreement Will Be Performed:
The length of time, or duration, that the non-competition agreement will be in force will depend upon the circumstances. If it is an employment agreement, the parties should consider the time until an employee will possibly take away valuable trade secrets, business relationships or other similarly confidential and intangible property. They are often 1-3 years. If the non-competition agreement is being entered into at the sale of a business, or as part of a settlement of a lawsuit, the duration of the non-competition agreement should be around 5 years. It should also be noted that under California law, a non-competition agreement entered into at the time a business is sold must not be more than one year after the agreement is entered into.
Geographical Scope:
The parties should consider the geographical scope of the restrictions, keeping in mind that most non-competition agreements must have a reasonable geographical scope associated with the duration period contained therein. Examples include: a non-competition agreement that provides for a duration of two years and contains a geographical limitation of 50 miles from the location of the business subject to the non-competition agreement; a non-competition agreement that provides that the employee must not work for any person, corporation or entity that competes with the company during his/her employment that has their principal place of business within 50 miles of the company, and for the next two years following his/her termination.
Specific Activities That Are Restricted:
These activities may include communications with employees, clients or customers, competing in any manner with the company, diverting its assets, and/or interfering with contracts. To the extent possible, the parties should state specifically what is prohibited. Also, make sure that the non-competition agreement does not unnecessarily impede the ability of the parties to perform under it.
Legally-Enforceable Non-Competes
The legal enforceability of non-competition agreements varies by jurisdiction. Some courts will not enforce a non-competition agreement if the employee can show that he/she would have worked for the employer even without having signed the agreement. If the non-competition agreement is too one-sided, courts in certain jurisdictions may refuse to enforce it.
Courts will sometimes look for evidences that the employer prepared the document with a view towards having it enforced. Employers can help ensure enforceability by including a reasonable temporal scope that has some relation to the length of the employment relationship.
To help ensure that a non-competition agreement is enforceable, employers may also want to include a reasonable geographic scope. An overly broad or unreasonable geographic scope could cause the non-competition agreement to be void ab initio.
An effective and enforceable non-competition agreement is one that is tailored to the employee in question. Courts generally look for some benefit or consideration provided to the employee as part of the non-competition agreement. For example, in order for a non-competition agreement to be enforceable, the employer may want to provide an employee with either (i) access to valuable trade secrets; (ii) a promise to employ the employee for some period of time; or (iii) periodic access to the employer’s customers.
Pros and Cons of Having a Non-Compete
Employers find that non-competition agreements or non-compete clauses in their employees’ contracts are an attractive way to enforce confidentiality and trade secret arrangements to protect their business from losing a significant competitive advantage to an exiting employee. The exercise of drafting and preparing to execute non-competition agreements is an expensive and highly technical process which can assist employers in protecting their business.
However, care must be taken to ensure that the agreement is drafted properly so that it will be enforceable. In the case of an improperly drafted or overly broad non-competition clause, a court may strike down the entire clause or rewrite the agreement. Therefore, even ‘benign’ restrictive covenants may be struck down by the courts if they are not well considered and drafted.
While such agreements are common in many sectors of the economy where the workforce is hired for specific skills and/or trade secrets are key components of the business, such clauses have been the subject of much debate and litigation over their validity and scope. Even if valid, enforcing a non-competition clause against an employee who is recruited by a competitor can result in bad relations between the two companies, particularly where both are competitors in a small niche market. A company may feel like it should wait till there is urgency to that specific situation before executing a non-competition agreement. However, the costs of waiting may be far exceeds the investment in preventive preparation.
Collectively, the US economy has found that non-competition agreements have played a part in shaping entire industries and entire regional economies in the US. A few notable cases arise from Idaho. In one of the first oil & gas leasing booms during WW2, the independent oil and gas producer Baker Hughes Tool Company, wanted to expand its operations to Idaho. It was not successful until it expanded its operations in Las Vegas. Las Vegas at the time, was also a boomtown. Eventually, Baker Hughes recognized the need to protect its know-how and trade secrets in all operating regions. The company drew its protection zone as a circular buffer around it operations and then determined the travel routes of its employees in their daily travel to work, to devoted training, for acquisition of refitting and repair of its drilling tools. If those routes lead to towns near a Baker Hughes facility, those towns lay in a protected zone of business that would be lost if that employee left Baker Hughes to go work elsewhere in the area. Baker Hughes would not allow its employees to work anywhere, including at its own in-center competitors, without signing a non-competition agreement.
The risk of using a non-competition agreement is that you are dividing your own business at that point in time, where one side will have all those employees and services and the other side will be unable to get a skilled employee to continue the same services for their business for a competing price. Baker Hughes needed a skilled trained workforce to protect its investment in training and it could only find that workforce if it had a non-competition agreement in place to protect its investment. Without a non-competition agreement, a reasonable individual would not risk his new financial independence to work for Baker Hughes when they knew they could simply move down the road and make the same money working for Baker Hughes’ competitors at a competing price and under less stressful conditions. Baker Hughes knew that labor would be transient and if it waited till a later time to require a non-competition agreement, it would lose its investment in training and would have to spend thousands more training a new employee to replace that one. Baker Hughes would rather spend the legal money once and hire/ train new employees than to lose existing employees and all their investments into the business. This is the logic that Baker Hughes used back then. Today, Baker Hughes is a multi-national with billions in sales and operations in over 80 countries and 42 states.
How to Write a Non-Compete
In drafting a non-competition agreement and preparing to consult a legal expert with experience in drafting non-competition agreements , there are several points to keep in mind.
What is the employee’s job title?
What specific duties will the employee perform under the agreement?
What is the nature of the business or organization with which the employee will be working?
For what period of time will the non-competition agreement apply?
What is the geographical area the employee will be restricted from working in?
Acknowledgment of at-will employment.
Disclaimer that the agreement is a legally binding document.
A description of what actions are prohibited by the non-competition agreement.
Clarification as to what actions the employer may take if the agreement is breached.
The non-competition agreement should specify the employee’s obligations to act with confidentiality and good faith.
A non-competition agreement should not be indefinite nor can it be used without limitations.
The duration and scope of a non-competition agreement must be reasonable.
Applicable law.
How to Use a Non-Compete Template (PDF)
In general, a noncompetition or nondisclosure agreement would work well as a PDF template if:
(a) the parties to the agreement take little issue with the form agreement
(b) the parties have an established relationship where a replacement agreement could be signed without much concern, and for that reason, the parties are looking for a quick and easy way to prepare and sign an agreement
(c) the parties have no need for anything other than a simple, straightforward, and concise agreement, and
(d) there is little to change in the future
If a situation arises where the form agreement must be changed or customized, consideration should be given to including that possibility in the original agreement.
When putting together an agreement of this nature, the parties should consider whether they want customization rights and how they plan to handle future customization needs. A party could seek a right to alter any agreement that it enters into by adding an amendment at a future date that identifies the contract to which the contractual right applies (the "amendment"); however, this can lead to complications if one of the parties to the agreement does not wish to sign an amendment or if one of the parties is not available. For that reason, one party can also insert language that allows for an amendment of the agreement at a later date, regardless of the other party’s approval or availability.
If an agreement of this nature is drafted to permit future customization, one of the parties may end up preparing an amendment that the other party doesn’t wish to sign. This difference in intent brings the parties back to the table to renegotiate the amendment, rendering the PDF template ineffective.
A more efficient way to address the issue of future customization is through the use of language similar to that found in legal briefs that "have a yo-yo effect," where any party who wants to include something new or different in the future has to strike the controversial language from the agreement. This language is useful in a situation like this because the PDF template may be inappropriate for amendment if the matter has already reached the point where a party is unwilling to change its current position. If a mutually agreed-upon amendment is sought during negotiations that had been absent from the original agreement, such an insertion could be an issue. The insertion in question provides that, if a party would like to have certain language included in the future, it may do so only after striking the version of the language currently in the agreement. In this way, the party will not be allowed to hold the renewal of the entire agreement hostage in order to obtain a better deal, but it can temporarily include certain language that may not have been in the initial contract.
Frequently Asked Questions Regarding Non-Competes
Q: What are the typical issues with non-compete enforceability?
A: The following non-exhaustive list identifies common issues with non-compete enforceability:
Q: How do I challenge a non-compete agreement?
A: There are a variety of ways to fight against a non-compete. For example, non-competes can be challenged on the basis of co-worker competition, termination without cause, no protectable interest, unreasonable scope, and you did not sign the agreement or did not write your signature .
Q: Are there any actions that I can take before my employment is terminated?
A: You do have options. You can:
Q: The Employee Handbook at my former employment mentioned signing a non-compete agreement. Is this enough to force me into a non-compete?
A: No, unless you signed a non-compete or severance agreement or it became part of your employment contract, you should not be bound. In addition, if the company was dissolved or acquired, your contract may have terminated.