Non compete clause, explained

A non-compete clause, often simply referred to as a “non-compete,” is a provision in a contract in which one party agrees not to enter into or start a similar profession, trade, or business that would compete with the other party. These clauses are often used in employment contracts, business sale agreements, and partnership agreements to protect business interests.

Here’s a deeper look:

• Purpose: The primary purpose of a non-compete clause is to prevent an individual (often an employee or former business owner) from exploiting the proprietary information, trade secrets, customer relationships, and other valuable assets of a business to compete against it directly.
• Duration and Geographic Scope: Non-compete clauses usually specify a duration (e.g., one year, two years) and a geographic region where the restrictions apply. These specifications are crucial because if a non-compete clause is overly broad in duration or geographic scope, it may be deemed unenforceable in some jurisdictions.
• Enforceability: The enforceability of non-compete clauses varies by jurisdiction. Some jurisdictions view them skeptically, believing they unfairly restrain trade or limit an individual’s right to work. In these places, for a non-compete to be enforceable, it must be reasonable in scope, geography, and duration, and it must protect legitimate business interests. Some jurisdictions might not enforce non-competes at all.
• Consideration: For any contract to be binding, there must be “consideration,” meaning each party receives something of value. In the context of employment, the job itself can be a consideration for the non-compete. However, if a non-compete is introduced after employment has already begun, additional consideration (like a bonus, raise, or other benefits) might be required for it to be enforceable.

It’s advisable for businesses and individuals to seek legal counsel when drafting, reviewing, or considering entering into an agreement with a non-compete clause to understand its potential implications and enforceability.

When is a non compete clause used?

A non-compete clause is used in various situations where one party wants to ensure that another party doesn’t engage in activities that could compete with or harm their business interests. Here are some common scenarios in which a non-compete clause is employed:

1. Employment Agreements: One of the most common uses is within employment contracts. Employers might include non-compete clauses to prevent employees, especially those in key roles or with access to sensitive information, from leaving the company and immediately working for a competitor or starting a competing business.
2. Business Sale Agreements: When selling a business, the buyer may require the seller to sign a non-compete clause. This ensures that the seller doesn’t simply take the proceeds from the sale and start a similar, competing business right away.
3. Partnership or Joint Venture Agreements: In partnerships or joint ventures, partners may include non-competes to ensure that individual partners don’t engage in competing ventures while the partnership is active or for a certain period after its dissolution.
4. Consultant and Freelancer Agreements: Businesses hiring consultants or freelancers for specific projects might include non-compete clauses to prevent these external professionals from taking the knowledge or strategies they’ve learned and offering similar services to industry competitors.
5. Exit Agreements: When an employee departs a company, especially under contentious circumstances, the company might require the departing party to sign a non-compete as part of a severance package or exit agreement.
6. Franchise Agreements: Franchisors often include non-compete clauses in their agreements with franchisees. This prevents the franchisee from using the knowledge and experience gained from running the franchise to set up a similar business that could compete with other franchise locations or the franchisor’s brand.

While non-compete clauses can offer protection for legitimate business interests, they must be crafted carefully. They should be reasonable in their geographic scope, duration, and the nature of the restricted activities to stand the best chance of being enforceable. Always consult with legal professionals when drafting or entering into agreements with non-compete provisions.

What is the typical term of a non compete clause?

The typical term of a non-compete clause varies based on jurisdiction, industry, and the nature of the relationship, but there are some general tendencies:

1. Duration: The duration can range from a few months to several years. Common durations are:
   • Short-term: 3 to 6 months, often used for lower-level employees or roles where the competitive advantage or proprietary knowledge may quickly become obsolete.
   • Mid-term: 1 to 2 years, which is quite standard for many industries and roles, especially for managerial or specialized technical positions.
   • Long-term: 3 to 5 years, more commonly found in agreements related to the sale of a business, high-level executives, or partnerships.
2. Geographic Scope: The geographic range can vary from a few miles for businesses with a localized clientele, to a whole country or even globally, especially if the company operates in multiple countries.
3. Nature of the Restriction: The specific activities restricted by the non-compete can vary. For example, a software engineer might be prohibited from working for direct competitors, while a salesperson might be prohibited from soliciting clients they worked with during their tenure at the company.

It’s important to note that for a non-compete clause to be enforceable, it generally needs to be reasonable in its restrictions. Overly broad or lengthy non-competes can be challenged in court and may be deemed unenforceable if they are viewed as overly restrictive or detrimental to an individual’s right to work.

Different jurisdictions have different standards for what’s considered “reasonable.” For instance, in some U.S. states like California, non-compete clauses are generally unenforceable (with certain exceptions), while in others, they are enforceable as long as they are reasonable in scope and duration.

Given the legal nuances and potential challenges to enforceability, it’s essential to consult with legal professionals when drafting or agreeing to a non-compete clause.