Non-compete: Overview, definition and examples
What is a non-compete?
A non-compete is a clause in a contract that restricts someone, usually an employee or business partner, from competing with the other party after their relationship ends. This could mean preventing them from starting a similar business, working for a competitor, or using confidential information gained during their relationship to gain an unfair advantage.
For example, a marketing manager who leaves their job might be restricted from joining a rival firm for a year in the same city, depending on the terms of the non-compete.
Why is a non-compete important?
Non-competes are important because they protect businesses from unfair competition. They ensure that former employees, partners, or contractors don’t immediately take insider knowledge, client lists, or trade secrets to a competitor or start their own competing business. For businesses, this can help maintain their competitive edge and safeguard investments in training, resources, and innovation.
At the same time, non-competes must be reasonable. Courts often scrutinize these clauses to ensure they aren’t overly restrictive or unfair, as they can limit a person’s ability to earn a living. Key factors include the duration, geographic area, and scope of the restriction.
Understanding a non-compete through an example
Imagine a software company hires a senior developer to work on a cutting-edge product. As part of their employment contract, the developer agrees to a non-compete clause that prevents them from joining a competing tech company in the same field for two years after leaving. This ensures the developer doesn’t immediately share the company’s proprietary knowledge with a competitor.
In another case, a franchise agreement might include a non-compete clause preventing the franchisee from opening a similar business in the same location for a specified period after the agreement ends. This protects the franchisor’s brand and customer base.
An example of a non-compete clause
Here’s how a non-compete clause might look in a contract:
“The Employee agrees that, for a period of one (1) year following the termination of their employment, they will not engage in any business, directly or indirectly, that competes with the Employer within a 50-mile radius of the Employer’s primary place of business.”
Conclusion
A non-compete clause helps businesses protect their interests by preventing unfair competition from former employees, partners, or contractors. While they can provide valuable protection, non-competes must be carefully drafted to ensure they are reasonable and enforceable.
By clearly defining the duration, geographic scope, and activities restricted, businesses can create non-competes that balance protecting their interests with respecting the rights of the other party. It’s an effective way to safeguard sensitive information and maintain a competitive advantage.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.