What is a Noncompete Agreement?
Noncompetes can either be a standalone legal document or included in another agreement as a "Noncompete Clause."
If you are looking to protect your company's proprietary information while also limiting potential direct competition, a Noncompete Agreement can help you.
When to use a Noncompete Agreement:
- You are terminating a relationship with an employee or contractor and want to prevent them from using proprietary information to compete against you after they leave the company.
- You want to prevent business partners from competing with your company in a different context.
- You are buying a business and you do not want the seller to start a competing business.
- You want to restrict employees from taking a job with a direct competitor.
This Non-Compete Agreement (this "Agreement") is made effective as of , by and between , of , , , , of , , , and , of , , , of , , .
. NON-COMPETE COVENANT. For a period of after the effective date of this Agreement, During employment and for a period of after the separation of employment for any reason, will not directly or indirectly engage in any business that competes with . will not directly or indirectly engage in any business with the following competitor(s):
Directly or indirectly engaging in any competitive business includes, but is not limited to: (i) engaging in a business as owner, partner, or agent, (ii) becoming an employee of any third party that is engaged in such business, (iii) becoming interested directly or indirectly in any such business, or (iv) soliciting any customer of for the benefit of a third party that is engaged in such business. agrees that this non-compete agreement will not adversely affect 's livelihood.
. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties regarding the subject matter of this Agreement, and there are no other promises or conditions in any other agreement whether oral or written.
. SEVERABILITY. The parties have attempted to limit the non-compete provision so that it applies only to the extent necessary to protect legitimate business and property interests. If any provision of this Agreement shall be held to be invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this Agreement is invalid or unenforceable, but that by limiting such provision it would become valid and enforceable, then such provision shall be deemed to be written, construed, and enforced as so limited.
. INJUNCTION. It is agreed that if violates the terms of this Agreement irreparable harm will occur, and money damages will be insufficient to compensate . Therefore, will be entitled to seek injunctive relief (i.e., a court order that requires to comply with this Agreement) to enforce the terms of this Agreement. The prevailing party shall have the right to collect from the other party its reasonable costs and necessary disbursements and attorneys' fees incurred in enforcing this Agreement.
. APPLICABLE LAW. This Agreement shall be governed by the laws of the State of Commonwealth of .
. CONFLICT RESOLUTION. In the event of a dispute between the parties, the parties hereby agree to use the as the venue. The In the event of a dispute between the parties, the parties hereby also agree that the prevailing party shall be entitled to reasonable attorney fees and costs incurred as a result of the dispute.
. SIGNATORIES. This Agreement shall be signed by , , on behalf of and by ., , on behalf of . This Agreement is effective as of the date first above written.
Non-compete Agreement Checklist
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___Sign this document. This document needs to be signed by:
The Agreement can be signed online. It becomes effective as of the date specified in the Agreement.
___Everyone gets a copy. Anyone named in the document should receive a copy of the signed document. If you sign this agreement online a copy will be securely stored in your account. You can share your document from your account.
The states of California, Montana, North Dakota, and Oklahoma do not enforce non-compete agreements. However, a non-compete may be enforceable in California if it is specifically against stakeholders in a business.
The Agreement will terminate in accordance with the time period(s) established for the covenants in the Agreement, or earlier by the mutual agreement of both parties. Any such mutual termination should be made in writing and signed by both parties.
About Noncompete Agreements
Learn about how to protect your company's proprietary information
Understanding Noncompete Agreements
A Noncompete Agreement is a type of contract where one party promises not to compete with another party. This can come up in different situations, for example, when:
- Two businesses are ending their working relationship.
- Someone is buying a business from another person.
- An employer and employee are ending their relationship.
In these situations, the party that wants protection (called the "Protected Party") may ask the other party (called the "Noncompeting Party") to agree not to: (1) start a similar business, or (2) try to take the Protected Party's customers or employees. The Noncompete Agreement form must be signed by both parties to be valid.
When the protected party is an employer, the employer may already have a Noncompete clause in an Employment Agreement to protect against competition. In that case, they may not need to use a separate Noncompete Agreement unless they're ending the employment relationship.
Following are some key issues to keep in mind when making a Noncompete Agreement.
As background information, the Noncompete Agreement may fully explain why the Agreement is being made. For example, "The Noncompeting Party is currently an employee of the Protected Party, but the employment relationship is being terminated. As provided in this Agreement, and in exchange for the consideration evidenced within, it is desired by both parties that the Noncompeting Party should not compete with the Protected Party's business or solicit the Protected Party's customers or employees."
Including background information gives the agreement context and makes it clear why the parties are entering into the contract.
Boundaries and Overreaching
Generally, Noncompete Agreements that overreach their geographical boundaries or have restrictions beyond what the employer's business actually does are typically not reasonable and are therefore not enforceable. The legality of restrictions in the agreement will be determined on a case by case basis in court. For example, a business that strictly operates within a certain state may have trouble imposing a nationwide Noncompete Agreement.
A Noncompete Agreement may be more favorably looked upon if it is effective and the least restrictive as possible. For instance, 2 years might be deemed a long time if the party cannot compete within a 10 mile radius of a city. However, 2 years might be more palatable if it is restricted within a 10 mile radius of the corporate office of the business or the office where the party will primarily operate.
Things get more complicated for internet-based businesses or businesses that sell globally because internet boundaries are not easily defined. Current technology has made the economy much more global, so a mileage limitation no longer applies to certain companies. Due to the changing nature of the laws in this area, it is best to consult with a Rocket Lawyer network attorney for specific legal guidance.
Employee Poaching Prohibition
Occasionally, when a key employee or former owner of a company is terminated or leaves the company, that departing individual will have developed relationships with some of the employees of the company and may wish to recruit those employees. Of course, this could lead to a significant drain on the Protected Party's workforce if several key employees decide to follow the departing individual. Therefore, it is common to prohibit the Noncompeting Party from contacting any of the Protected Party's employees about a possible job for a specified number of years. Although it can be very difficult to prove that an employee quit at the urging of the Noncompeting Party, this provision does serve to at least provide a warning to the Noncompeting Party to not attempt such practices.
The Noncompete Agreement includes a "non-solicitation" covenant (agreement). This covenant provides some protection against the possibility that the Noncompeting Party might try to use customer information and contacts with employees of the Protected Party to compete with the Protected Party. Although this may not ensure that the Noncompeting Party will not try to circumvent these provisions by acting in a secretive manner, it does provide at least a "warning" to the Noncompeting Party.
State Law Limitations
Because of important state specific requirements, a lawyer should be consulted before using a Noncompete Agreement template. Some states have noncompete laws that are very strict, leaving companies to wonder are noncompetes enforceable at all. State laws regarding Noncompete Agreements are particularly stringent in Alabama, California, Colorado, Delaware, Hawaii, Illinois, Louisiana, Montana, North Carolina, North Dakota, Oklahoma, Oregon, South Carolina and South Dakota.
California specifically prohibits Noncompete Agreements as a matter of public policy, although there are some limited exceptions, such as a partner selling a business. Noncompete Agreements are sometimes judged effective against California residents when the agreement is governed by a different state's laws (for example, Washington in Meras Engineering inc. v. CH2O, Inc.).
Other states might hold that certain occupations or classes of workers, like low-wage employees, cannot be bound by post-employment agreements not to compete.
Generally, in other states, for a Noncompete Agreement to be enforceable, the Protected Party must have a protectable business interest in specific customer or trade information. In addition, the restrictions must be reasonably limited to the:
- Scope of the prohibited activity.
- Time period that the restrictions will be in effect.
- Territory in which the activity will be prohibited.
Whether the restrictions are reasonable may depend on the specific facts of each situation. A court will also look to see if enforcement of the do-not-compete clause would cause undue hardship on the parties or cause harm to the general public.
Noncompete Agreements and Confidentiality
The Noncompete Agreement often includes a confidentiality provision that requires the Noncompeting Party to protect and not disclose the Protected Party's proprietary or confidential information. For example, this would prohibit the Noncompeting Party from telling his or her new employer the Protected Party’s unique and proprietary production process. A provision may also be included which will require the Noncompeting Party to return all records, notes, documentation, and other information within a specified number of days after being requested to do so. If this agreement is part of an employee termination, such a request should be made at the time the agreement is executed or signed by both parties.
"Confidential information" is information that is unique and could be harmful to the Protected Party if disclosed. Court decisions vary from state to state, and in some cases, may impose a time period for which the Protected Party's information must be kept confidential.
Noncompete Agreements and Payment
A payment to the "Noncompeting Party" under a Noncompete Agreement is necessary in order for the agreement to be enforceable. The amount of the payment should be reasonable when compared to the loss of the "ability to compete" that is being made by the Noncompeting Party. In many cases, a substantial payment will not be required. However, if the Noncompeting Party's ability to "earn a livelihood" is affected significantly, the payment amount may need to be more substantial.
When a Noncompete Agreement is included as a part of an Employment Agreement, a separate payment for the Noncompete Agreement may not be required. Instead, the execution of this Noncompete Agreement as a term of employment may suffice as consideration.
Return of Records
If a confidentiality provision is included, it is also advisable to request that the Noncompeting Party return all records, notes, documentation or any other items that may be of importance that are the property of the Protected Party. If the agreement is being entered into because of a termination of employment, it is recommended that the written request be given to the Noncompeting Party at the first available opportunity.
Noncompete Agreement FAQs
Why are Noncompete Agreements used?
You may be wondering why your company is asking you to sign a Noncompete Agreement or why you should ask your employees to sign one. Reasons vary, as well as enforceability, but generally the reasons include:
- To protect proprietary information such as patent or trademark information, manufacturing processes, business processes, and more.
- To make the company more attractive to buyers. If the business is planning to be acquired in the future, it may make the business more attractive if the buyers know that employees have signed a Noncompete Clause.
- To help protect client information. Instilling customer confidence is important to nearly any business. Noncompetes can help protect restricted client data.
- To educate new employees what is expected of them in terms of protecting the company's proprietary data.
- To increase the chances of qualifying for trade secret protection. To benefit from this protection, your business proprietary knowledge must be indeed secret.
How should I write a Noncompete Agreement?
If your business resides in a state that supports Noncompete Agreements, they can be a useful tool to help you protect your business. Often employers include one in the hiring paperwork. They can also be used to restrict business partners or clients from directly competing with your business or sharing proprietary information.
Noncompete Agreements can be tailored to your specific business needs, but most cover three basic areas:
How long the agreement lasts. Usually, the terms are six months to a few years. However, some states may limit the duration. Extended terms of a few years or more rarely hold up in court.
If the business is local, you may define a specific area that is restricted. For example, if you have a lawn care business, you may want to limit former employees from starting up the same type of business in your area.
This part of the agreement should be specific to stand up in court. If the terms are too broad, you'll have a hard time enforcing them. Scope includes information such as what type of work is restricted. It may also include a description of what you consider direct competition.
What are the benefits of using a Noncompete?
The advantages to these agreements clearly reside on the employer's side. Because of this, many states are beginning to enforce restrictions on Noncompete Agreements.
- Pros: Limits sharing of proprietary information, restricts use of client lists, lessens the potential for direct competition in your market
- Cons: Your company may become less attractive to qualified workers, can inhibit morale and the desire to excel, may be difficult to enforce
- Pros: Some feel a Noncompete protects their company and in turn their job
- Cons: May restrict career development, may prevent former employees from obtaining local work
How can I enforce a Noncompete Agreement?
When making your document you'll want to focus on issues that could affect your business in a negative way. If you go to court, you'll have to show reasonable potential damage or actual damage to your business. In the past, companies have lost court cases because they could not prove actual damage or loss of business directly resulting from their challenger. In addition, it may appear that enforcing the agreement seems to lean more towards punishing the past employee than protecting business interests. Building the agreement correctly in the first place can help you be more successful should you go to court.
Why is compensation important when enforcing a Noncompete?
For the Noncompete Clause to be enforceable the signee must receive some type of compensation, which is often called a consideration. If it is a new-hire, the salary may be the consideration. If the agreement is not signed, the job offer may be rescinded. If an employee is leaving the company, a lump sum payment may be the consideration.
Should I require my entry-level employees to sign a Noncompete Agreement?
The point of a Noncompete is to protect your business. Before asking entry-level or low-wage employees to sign an agreement, evaluate whether you really are protecting your business. Or are you preventing people from advancing in their career and seeking gainful employment in a way that might seem unfair? For example, are you gaining much by restricting your sandwich makers from working for any other sandwich shop within five miles of your business? Or are you limiting their opportunity for advancing their career? Some states argue that you may be unfairly blocking people from gainful employment. You may benefit from consulting with an employment lawyer about who you require to sign a Noncompete.
Should I sign a Noncompete Agreement?
Before you sign an agreement as a new hire, carefully evaluate the terms of the agreement. How long does the agreement last? Are there geographical restrictions? How broad is the definition of a "competing business?" If you are separated from the company, how difficult would it be to find new work without violating the agreement? If you cannot answer these questions satisfactorily, you may want to reconsider signing. Some job seekers even chose to move to states that enforce limitations on Noncompete Agreements, so they are freer to advance their careers.
What if I've already signed a Noncompete?
If you have already signed an agreement, you'll want to carefully review it before you take a job with another company. Some who have failed to do this, are accused of violating their agreement and end up jobless. Besides becoming jobless, many who lose in court are also burdened with extensive legal fees. If you need to change jobs to advance your career you may need to consider doing it in a way that does not violate your Noncompete Agreement such as by moving to another region or changing industries. You may also be able to simply ask them to be released from the agreement. If they agree, get the release in writing.
I signed a Noncompete, is it enforceable?
If you have signed a Noncompete Agreement and have since left the company or are looking to start a new business, the first thing you'll want to do is review the document you signed. What are the exact restrictions? How long do the restrictions last? Would your new company be a direct competitor? And if so, how much does it compete? Does it compete against their main product or service, or an item they rarely sell? Would you be infringing on a protected patent or trademark? Would the name of your new company be similar to the name of the company you left? You'll also want to review your state and local laws to see if they have laws against certain noncompete provisions. If you are unsure about whether you would be violating an enforceable Noncompete, contact an employment lawyer for assistance.
If you are an employer, we provide a wide range of human resources information and employment documents. You may want to start by visiting our Human Resources Guide.
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