What Is a Non-Competition Agreement?

A non-competition agreement is made between two parties, often an employer and an employee, where the employee agrees they will not use information learned, heard, or discovered in future business for a duration of time. This can also include goodwill that is created through relationships with clients.

Sometimes an employer may ask new employees to enter into this type of agreement as a condition of a job offer. If an employer asks an employee to enter into this type of agreement once an offer has been made, then other forms of compensation must be provided in lieu of a job offer. This could include a promotion or other benefits.

In most cases, a non-competition agreement stops an employee from working for a competitor or competing directly against the company themselves. The agreement outlines how long the party cannot compete, what the geographical limitations are, and what topics or industries it covers.

These types of agreements are made to protect businesses upon the termination or resignation of their employees. They do not want employees to share trade secrets or confidential information regarding their business. This also includes goodwill developed by an employer, meaning an employee cannot use that goodwill with a client to compete with their former employer.

When it comes to a legal dispute, courts will generally disapprove of non-competition agreements if they impact a former employee's ability to earn a living. They are closely looked at in the court system. Some states do not enforce non-competition agreements the same way. In California, unless the agreement is made with a stakeholder in a business, not an employee, a court will not enforce it.

Requirements for a Non-Competition Agreement

To create a valid non-competition agreement, the contract must protect a business interest of the employer (i.e., confidential information) and must be reasonable in region, duration, and scope. It must also show consideration, what will the employee receive in exchange for refraining from the competition?

An employer must show that they took measures to ensure that the information was kept secret and that the information gives them a competitive advantage.

The duration of each agreement is dependent on the facts of each case. If the agreement protects specific information, the time period of the agreement should not be longer than the time for which that information is valuable.

The geographical area must also be reasonable given the circumstances. This depends on the services the employee provides to the company, and how important they are to the business. A court will likely dismiss an agreement that prevents an employee from working in an area where the employer does not do business.

Information Needed to Create a Non-Competition Agreement

You will need the following to create a non-competition agreement:

  • An effective date that the agreement will begin to protect the protected party against the non-competing party.
  • A list of names and address of the parties in the agreement.
  • A statement of the reason for the non-competition agreement.
  • A specified time period for the agreement.
  • A specified geographical area for the agreement. This could be one state, a specific distance, or a described geographical location.
  • A statement of how the non-competing party will be compensated.
  • A list of individuals who will be signing the agreement.

Some Possible Terms for the Non-Competition Agreement

The following are a list of terms that could be present in a non-competition agreement:

  • A protected party's customers or clients cannot be solicited by the non-competing party.
  • A protected party's employees cannot be hired by the non-competing party.
  • A protected party's confidential information cannot be disclosed by the non-competing party.

Limitations of a Non-Competition Agreement

Recent court cases are showing that courts enforce non-competition agreements depending on specific facts and circumstances.

In one particular case, Instant Technology, a staffing firm, sued five of its former employees after they went to a competing firm. These employees signed an employment agreement that promised they would not solicit business from Instant's clients, recruit their employees, or disclose proprietary information. It was claimed that all five employees violated their agreements.

The employees who moved to the competing firm argued that their conditions were unreasonable. The judge agreed, which meant they could not be enforced. To arrive at this decision, the judge looked at the nature of relationships that staffing firms have with their clients and realized there is no customer loyalty and that clients usually have several staffing firms at once.

This shows the importance of creating non-competition agreements that are specific and narrow and spell out exactly what you hope to achieve.

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