Non Compete Contract: Everything You Need to Know
A non-compete contract is made between two parties, stating that one of these parties agrees not to compete with the other party for a duration of time.4 min read
What Is a Non-Compete Contract?
A non-compete contract is made between two parties, stating that one of these parties agrees not to compete with the other party for a duration of time. A non-compete contract can be a clause within a larger contract, or it can be a stand-alone document.
These types of contracts can also be called a non-compete agreement, non-compete clause (NCC), or covenant not to compete (CNC).
A non-compete contract is often required by employers before new employees begin work. The conditions of the agreement usually begin at the end of employment, or the business relationship, but is often a decision made before the relationship goes into effect.
Why Do People Enter Into Non-Compete Contracts?
A contract makes it less likely that any knowledge gained by an employee or through the business relationship will be used to compete with the other party in the future. This includes any goodwill or customer relations that an employee has cultivated.
Generally, a non-compete contract prevents a party from competing with the other party or working for a competitor. Non-compete agreements bind the protected party and the non-competing party in the following ways:
- The protected party's clients and customers cannot be solicited by the non-competing party.
- The protected party's employees cannot be hired by the non-competing party.
- The protected party's confidential information cannot be disclosed by the non-competing party.
What Is Needed to Create a Non-Compete Contract?
If a non-compete contract is a condition of employment and the contract is signed prior to beginning employment, that is sufficient compensation for the promise to not compete. If the contract was not signed at the time of employment, the promise of continued employment is not enough, and a fee or other benefits outside of the original compensation may be received in exchange for the promise to not compete.
Non-compete agreements should have the following information:
- An agreement effective date. This is the date that the agreement will begin protecting the protected party (i.e., the employer) against the non-competing party (i.e., the employee).
- A list of names and addresses of both parties.
- A statement outlining the reason for the agreement.
- A specific time period for the contract.
- A geographical area for the non-compete contract. This could be a state, within a specific distance of a particular city, or the area can be described in detail.
- A statement of how the non-competing party will be compensated.
What Is Considered Confidential Information in a Non-Compete Contract?
If an employer wants information or trade secrets to be protected in a non-compete contract, the employer must prove that it took appropriate action to keep the information secret and that the information would give others a competitive advantage. In the case of confidential information, the duration of the agreement should be no longer than the time for which the information holds value.
What Is a Reasonable Scope of a Non-Compete Contract?
A time-period should be chosen for which the clause will be enforceable, and/or an employer can require that all property be returned within a specific period of time after a request has been made.
When it comes to a geographical area, it is dependent on the services that the employee provides, and how critical they are to the business. A court generally will not enforce a non-compete contract if the employee is working in a location where the employer does not do business.
An agreement can only prohibit a specific type of job function. It cannot prohibit a former employee from engaging in other forms of business.
How Are Non-Compete Contracts Treated in Court?
If a non-compete contract is affecting one's right to earn a living, a court will generally rule against the protected party. If the court finds that the agreement is too broad, it might make its own decision about scope and duration and will enforce it as modified.
Here is what a protected party needs to include in a non-compete contract to look favorable in a court of law:
- A good business reason for asking the employee to sign the non-compete contract.
- A contract that does not punish employees for leaving.
- Selective non-compete contracts only for employees that actually hold trade secrets.
- Job offers that are contingent on signing non-compete contracts as this can be used in lieu of compensation for signing.
Many states are currently looking at the way non-compete and non-disclosure agreements are being handled and abused. Some are looking to change their laws regarding them.
What Is a Non-Disclosure Agreement?
Different from a non-compete contract, a non-disclosure agreement is a contract that means an employee or business partner will not disclose things the employer or company finds to be confidential.
A non-disclosure agreement does not mean you cannot work for a competitor of the company. It means you cannot use the information you learned while on the job, at a new employer.
The Future of Non-Compete Contracts
Over the last 20 years, trade secrets are becoming more important to businesses. With the increase of movement between jobs, many employees are taking information with them to new jobs. About 20 percent of American workers have agreed to non-compete contracts, and 37 percent of American workers will sign one at some point in their career.
If you are asked to sign a non-compete or non-disclosure agreement, you should review it closely as it becomes legally binding should you leave for any reason. Should you decide to leave a position in which you have signed a non-compete contract, talk with your employer to learn more about releasing you from the agreement and what can be done to help.
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