Covenant against competition: Overview, definition, and example
What is a covenant against competition?
A covenant against competition, also known as a non-compete clause, is a provision in a contract that restricts one party (typically an employee, business partner, or seller of a business) from engaging in competitive activities within a certain geographical area and for a specified period of time after the contract’s termination or expiration. This covenant is designed to protect a business’s interests by preventing individuals from using proprietary knowledge, skills, or relationships to compete directly against the business once they leave or exit the agreement.
Such covenants are commonly included in employment contracts, sale agreements, and partnership agreements to protect trade secrets, customer relationships, and business strategies.
Why is a covenant against competition important?
A covenant against competition is important because it helps businesses protect their intellectual property, customer base, and market position. By preventing former employees or business partners from starting or joining a competing business, companies can safeguard sensitive information and ensure that their investments in training, branding, and development are not undermined by direct competition from ex-affiliates.
For individuals, understanding the terms of a covenant against competition is crucial to avoid legal disputes after leaving a company or ending a business relationship. These clauses can significantly limit future employment or business opportunities, so both parties must carefully consider the scope and enforceability of such provisions.
Understanding covenant against competition through an example
Imagine a software developer who has worked at a tech company for five years. Upon leaving the company, their employment contract includes a covenant against competition, prohibiting them from working for a competing software company in the same city for two years. The company is concerned that the developer might use the proprietary knowledge they gained during their employment to help a competitor gain an advantage in the market.
In another example, a business owner sells their company to a larger competitor but includes a covenant against competition in the sale agreement. The seller agrees not to start a competing business within 50 miles of the purchased company for five years. This ensures that the buyer will not face direct competition from the seller once the transaction is complete.
Example of a covenant against competition clause
Here’s what a covenant against competition clause might look like in an agreement:
“For a period of [X] years following the termination of this Agreement, whether voluntary or involuntary, the Employee agrees not to engage in any business or employment that directly competes with the Company within a [X] mile radius of the Company’s primary place of business. This restriction applies to both direct and indirect competition, including the establishment of a competing business or employment with a competing entity.”
Conclusion
A covenant against competition is a crucial tool for businesses to protect their intellectual property, customer relationships, and competitive edge. While it can help prevent former employees or business partners from leveraging their knowledge against the business, it is important to ensure that the scope of the covenant is reasonable in terms of time, geography, and activities covered.
For businesses, including a well-crafted covenant against competition can help safeguard critical assets. For individuals, understanding the limitations imposed by such covenants can help avoid future employment or business difficulties.
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.