Non-Compete Meaning

The non-compete meaning is a contractual agreement that exists between an employer and employee that states that the employee agrees not to use any information gained while working for the employer to either aid a competitor or for use with a competing business idea. The non-compete is also commonly referred to as a non-compete agreement, non-compete covenant, non-compete clause, and a covenant not to compete.

What Does a Non-compete Agreement Cover?

Non-compete agreements aim to protect the intellectual property and confidential information of an employer against instances such as employees starting their own business in the same field or leaving the company to work for a competitor and sharing industry secrets. The agreement protects information like client lists, supplier lists, marketing plans, employee details, and other sensitive data.

When Does It Apply?

Non-compete agreements may be contained within an employee's employment contract in the form of a non-compete clause (NCC). Much like the rest of the employment contract, the NCC is a legal agreement and states that employees will not enter extracurricular business activities that compete with their employer. These agreements may also be used when a business purchases an already established business and wants to protect itself from conflicting interests by the members of that business.

Typically, the non-compete agreement specifies an amount of time and a geographical area within which the employee cannot engage in competing practices. Any dates must be determined in advance so that both parties are under agreement and understand fully what they are committing to.

Potential Enforcement Issues

Courts do not always uphold non-compete agreements if an employer takes action against a former or current employee, and there are issues regarding whether or not non-compete agreements are legally binding in a court of law.

The argument can vary depending on the particulars of the case. For example, what exactly the employee did, whether or not the agreement was too restrictive, the state law (some states don't consider these agreements at all, whereas others only consider particular employment types relevant), and so on.

Provided the limitations of the agreement, the effective dates, and clear expectations, the employer should have a better chance of ensuring they have a legally binding non-compete agreement.

What Is Included in a Non-compete Agreement?

The interests of both sides should be balanced when drawing up an agreement. This should typically include the following details in order for the agreement to be considered as a legally binding document:

  • Effective date from which the agreement starts
  • A reason why the agreement is being used
  • Clear dates and locations for when and where the employee cannot work in competition
  • Details for compensation that will be given if the individual agrees to the terms

In the event of a legal challenge, the majority of states use a three-part test when deciding whether or not a non-compete agreement should be withheld:

  1. Time
  2. Size of prohibited geographical region
  3. Why the business feels it is necessary

The courts are mostly concerned with whether unfair restraints are placed on an individual. The level of scrutiny applied to the accused party will vary depending on their circumstances. For example, the behavior of former employees who have moved on to similar businesses is scrutinized more closely than the behavior of the seller of a company.

The U.S. is a free market, and the stance of the court is often that in most cases, businesses cannot reasonably express the need to restrict competitive actions. Many states will use the aptly named "blue pencil doctrine of severability," which involves analyzing the agreement and finding some parts as enforceable, and others not. If even a small part is found to be unfair, then the court can throw out the entire agreement and court case.

Non-compete Agreement vs. Non-disclosure

Both of these agreement types are becoming more and more common today, especially as we are living in a more information-driven, technology-oriented age, and businesses become more concerned about their intellectual property being leaked or copied. The two agreements are slightly different.

A non-compete agreement means that an individual agrees not to compete with their existing or former employer for a specified period of time. On the other hand, a non-disclosure agreement details that the employee agrees not to disclose sensitive or proprietary information, but does not prohibit the employee from working for a competitor.

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