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What is a Non-Compete Agreement?

Many companies request that their employees (and contractors/consultants) sign non-compete agreements, or contracts containing non-compete clauses. By signing, employees agree not to start a competing business or work for a competitor for a specific amount of time after their employment ends; these agreements also specify geographic location and/or market restrictions. Non-competes are also sometimes known as “covenants not to compete” or “restrictive covenants.”

 

From the perspective of a business owner, it is easy to understand why having strong non-compete agreements with employees is important. These agreements ensure that ex-employees will not (i) use crucial information learned during employment to compete with the company, or (ii) recruit clients, customers, or other employees to leave too.  Ultimately, these restrictive covenants help limit the competition a business may face from those who are best suited to contend in the marketplace: former employees who have insider knowledge of the inner workings of the operation.

Validity and Enforcement of Non-Compete Agreements

The validity and enforcement of non-competes vary by jurisdiction. In a few states, non-compete provisions are not enforceable at all. Most states, however, take the position that non-compete agreements may be enforced so long as they are reasonable in scope—particularly with regards to the length of time and/or geographic area. For example, the shorter the length of time of the restrictions, the higher probability there will be that the non-compete will be viewed as reasonable by a court (restrictions for 1-2 years are more likely to be upheld than those for several years in the future). Likewise, a non-compete provision restricting competition in a specific, limited geographic region is more likely to be upheld than a provision that encompasses a large, broad area. It is important to note that non-compete agreements should not materially restrict the employee’s ability to find future employment.

 

When it comes to who business owners can reasonably request sign non-competes, they should take into account the role of the employee—and whether it’s necessary to protecting the business. High-level employees who learn the “ins and outs,” trade secrets, and other confidential information of the company can conceivably do much damage if they leave to start a competing enterprise. On the other hand, lower-level employees who perform basic administrative or customer service tasks likely wouldn’t be much of a threat if they went to work for a competitor. While these are general guidelines, note that jurisdictions have differed widely on what conditions and terms of non-compete agreements are considered reasonable.

Non-Competes are Distinct from NDAs

Keep in mind that non-compete agreements are entirely separate from non-disclosure agreements (NDAs), which generally don’t prevent an employee from working for a competitor. The key difference is that while NDAs prevent employees from sharing, or making available to others, certain sensitive information that the employer considers to be proprietary or confidential—non-compete agreements restrict that employee from actually engaging in competition.

Contact The Castle Law Firm

Non-compete agreements require attention from a thorough, experienced attorney. The Castle Law Firm is highly skilled at helping its clients draft, enforce, and analyze non-compete agreements—both from the employer and employee perspective. Whether your business is looking to draft a new non-compete agreement, strengthen existing restrictive covenants, or negotiate the scope and reasonableness of certain non-compete provisions, we have you covered. Contact the firm online or call 312-574-0856 to schedule a free consultation today.