Introduction

Reading through your business contracts can sometimes feel like wading through thick legal language. One term you’ll often come across is a “non-compete clause”, especially if you’re dealing with employment or business sale contracts. This clause plays a really important role in protecting your business. Let's discuss what a non-compete clause really means and explore if you might need one for your business dealings.

Read: 5 signs it’s time to invest in an AI contract review tool

What is a non-compete clause?

A non-compete clause is a rule in a contract that stops one party from starting or joining a similar business or job that competes with the other party, usually after they part ways. You'll typically find this clause in employment contracts, partnership agreements, or when one business is sold to another. It helps ensure that one party doesn't use what they've learned to compete unfairly against the other after their agreement ends.

What’s the purpose of non-compete clauses?

The main purpose of a non-compete clause is to protect a company’s important secrets and the relationships it has with its customers. It stops former employees or business partners from using what they learned—like confidential information and contacts—to start a competing business. Basically, it helps keep the company safe from competition that could come from someone who already knows how to replicate its success.

Key elements of a non-compete clause

A non-compete clause usually has three key ingredients:

Duration

This part of the clause tells you how long the restrictions last after the contract ends. The time frame can vary from a few months to a year or more. The duration often depends on the industry standards and the significance of the role in the company. For instance, higher-level positions might have longer restrictions because of their deeper insights into company strategies.

Geographic clause

This defines the physical areas where the restrictions apply. It can be as specific as a few city blocks for a local business or as broad as an entire country for a multinational corporation. The idea is to prevent competition in areas where the original company operates, balancing fair competition with business protection.

Scope of prohibited activities

This section is crucial because it spells out exactly what the former employee or partner can't do. It's not enough to say "don't compete with us"; the clause should specify forbidden activities. For example, if you run a tech company, the clause might prevent the person from working in a similar technology sector, starting a similar tech business, or working in any role that could leverage trade secrets against the original company. This precision helps prevent disputes by making the restrictions clear and tailored to the company's needs.

Each of these aspects is designed to protect the business without unfairly restricting someone’s future job prospects. The key is to be clear and reasonable, ensuring that these provisions are enforceable and justifiable, protecting the company's interests while respecting the individual’s right to move on and work elsewhere.

Read: How can I amend a contract after signing?

Crafting a fair and reasonable non-compete clause

In the middle of putting together a non-compete clause for your contract? Here’s what to consider:

Reasonableness

When setting up a non-compete clause, make sure it’s fair. The length of time the clause lasts, where it applies, and what specific activities are off-limits should be reasonable. They shouldn't be so strict that they stop someone from making a living after they leave your company. For example, asking a former employee not to compete directly with you in the same city for six months is one thing; expecting them not to work in their field anywhere in the country for ten years is probably too much.

Legal advice

It’s smart to work with a lawyer who knows the ins and outs of local business laws to help you write a non-compete clause. They can make sure your clause does what it needs to protect your business without crossing legal lines. This way, the clause stands a better chance of holding up in court if ever challenged.

Transparency and communication

Be clear and upfront about the non-compete clause with anyone who might have to agree to it. Explain why it’s included and what it entails. When people understand what they’re signing and why certain requests are being made, they’re more likely to feel the terms are fair, which can lead to fewer disagreements and a stronger, more open business relationship (in other words, don’t be a meanie).

Read: How to read business contracts like a lawyer

Conclusion

Non-compete clauses can act like a shield for your business, helping to keep potential competition at bay. However, adding one to a contract isn’t a one-size-fits-all solution. It’s crucial to tailor these clauses to fit your specific business needs, the roles of the people involved, and the legal rules of your area. Whether you choose to include a non-compete clause or not, it’s wise to work with a legal expert. They can help ensure that your clause is not only protective but also fair, balancing your business’s safety with fairness to the individuals involved.

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

Get started here.