What is a Non-compete Agreement?
Navigation
- What is a sample non-compete clause?
- How to terminate a non-compete clause
- What is a reasonable length for a non-compete clause?
- How enforceable is a non-competition clause?
- How do you write a non-competition clause?
- When will non-competes be illegal?
- How to negotiate a non-compete agreement
- What states do not honor non-competes?
What is a non-compete clause?
Non-competes can be independent agreements or clauses within other business contracts, and are often part of larger business transactions. Non-competes prevent contracting parties from engaging in competing business for a certain amount of time and within a certain geographical area. Non-competes typically favor one party that hires the restricted party. The purpose is to restrict hired parties from utilizing the skills, training, and confidential information, obtained from working for hiring parties, from being used to compete with the hiring party.
What is a sample non-compete clause?
Non-compete clauses should be part of a comprehensive contract with recitals, other core terms, confidentiality provisions, and miscellaneous provisions. An example of a non-compete clause is as follows:
The Contractor hereby covenants with the Company that, during its engagement with the Company and for a period of one (1) year thereafter it will not:
other than as a Contractor of the Company, either directly or indirectly, operate or perform any advisory, consulting or employment services for, invest in, or otherwise operate or become associated in any capacity with, any company, partnership, organization, proprietorship or other entity which is, or proposes to be, engaged in the business of Company at any time; provided, however, the foregoing shall not limit the Contractor’s investment in any corporation or other entity whose stock or equity interests is or are traded on a national securities exchange;
induce or encourage any employee, consultant, agent, independent contractor, customer or supplier of the Company to terminate said relationship, or induce any supplier to terminate its relationship with the Company; or
solicit or transact any business with any current or former customer or client of the Company in competition with the Company, including the Identified Customer.
How to terminate a non-compete clause
A non-compete clause generally terminates after a set amount of time passes from the termination of the contract containing the non-compete clause. To terminate a non-compete early, a restricted party would need to obtain the written consent of the other party, obtain a declaratory judgment from a court declaring the clause void/terminated, or the restricted party would need to void the contract entirely. Terminating a contract sets an end date, but voiding a contract treats the contract as if it never existed.
What is a reasonable length for a non-compete clause?
A reasonable length for a non-compete is between 1 and 5 years, depending on the industry, the relationship of the parties, and the business interest being protected. However, courts generally favor shorter durations, preferring between 1 and 2 years.
How enforceable is a non-competition clause?
Non-competition clauses are becoming less enforceable across the nation. Some states and some industries ban them outright. In allowable situations, a non-competition must be narrowly tailored to protect a legitimate business interest.
How do you write a non-competition clause?
To write an effective non-competition clause, you should clearly define the business interests being protected by the clause. It may also be beneficial to include acknowledgements of what limitations are reasonable and why they are reasonable.
When will non-competes be illegal?
The Federal Trade Commission (“FTC”) banned non-competes between employers and employees on May 7, 2024. However, this ruling has been opposed by some states. The long-term effect of the FTC ruling has not yet been established.
How to negotiate a non-compete agreement
Employers should seek to impose restrictions that are reasonable and narrowly tailored to prevent a real risk of damage from competition. Employees should seek to ensure they don’t prevent themselves from gaining employment in their field if the non-compete becomes effective and they lose their job.
What states do not honor non-competes?
Non-compete agreements are generally prohibited (with certain exceptions) in California, North Dakota, Oklahoma, Washington, Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, and Virginia.
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Attorney Collier started his own law firm straight out of law school and has been practicing law in Ohio for 5+ years. During that time, Joe focused on business law and litigation, gaining some exposure to intellectual property law. While running his firm in 2021, Joe decided to go back to school and get his patent license. Since then, Attorney Collier has been focusing on protecting innovators and entrepreneurs through his expertise in intellectual property and business law.