Non-Compete Agreement

An undertaking, usually obtained from an employee or the seller of a business not to compete with the employer or purchaser for a period of time. Such agreements are usually required to be reasonable in time and scope and can be held invalid if they go too far, i.e., they effectively render the signer unemployable in their profession within his or her existing community or industry or are otherwise unreasonable in temporal, geographic or commercial scope. Non-competes are also disfavoured if they are likely cause a restricted party to be unemployed, in particular because they may tend to create a public charge. Indeed, in a number of U.S. states they are illegal and unenforceable when applied to individuals, for example, California.

Non-compete agreements between companies are also legally risky and can raise antitrust and competition law issues in many jurisdictions. However, as noted above, limited term and scope non-competes are common and usually acceptable in mergers and acquisitions or sales of business lines. Buyers of a business usually seek non-competes from the owners and senior managers of an acquired business because of a concern that, after the buyer has paid a high price for the business and its goodwill, the former owners/management might set up a competitor using the goodwill.

In general, if a non-compete by its terms is unreasonable, in most legal systems it is void, even if a party to the non-compete tries to enforce it in a more reasonable way than its language contemplates. In addition, since the enforceability or not of a non-compete is usually considered a ‘public policy‘ matter, it is not necessarily controlled by a choice of law clause. For this reason, non-compete agreements should usually be tailored to protect specific interests and it is wise to establish some internal process for each and every agreement in which the interests the non-compete is intended to protect are identified and the non-compete’s duration and scope are established and justified. Sweeping requirements that all employees sign standard-form non-competes, regardless of their work-function, or non-disclosure agreements that amount to an effective non-compete, should generally be avoided in favour of more individually tailored agreements. Non-compete agreements for unskilled workers, especially those who lack access to any reasonably confidential information are also highly controversial and legally suspect. Again, the largest legal threat to an effective non-compete agreement is over-enthusiasm – going too far.

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