Non-competition covenant: Overview, definition, and example
What is a non-competition covenant?
A non-competition covenant, often called a non-compete clause, is a provision in an agreement that prohibits one party, typically an employee or business partner, from engaging in certain competitive activities within a defined period, geographical area, or industry after the agreement ends. The purpose of this covenant is to protect the business interests, trade secrets, and confidential information of a company.
Why is a non-competition covenant important?
A non-competition covenant is important because it helps prevent former employees or business partners from using knowledge, skills, or confidential information gained during their time with a company to directly compete against it. This helps safeguard a company's intellectual property, market share, and customer base. Without a well-drafted non-compete, businesses may face the risk of competitors benefiting from insider knowledge and strategies, which could undermine their market position.
Understanding a non-competition covenant through an example
If a senior executive leaves a technology company, the non-competition covenant in their employment contract might prevent them from joining a competitor or starting a competing company within a certain radius for a period of two years. This ensures the executive does not use the proprietary knowledge they gained at the company to harm its competitive advantage.
Example of a non-competition covenant clause
Here’s how a non-competition covenant clause may appear in an employment agreement:
"For a period of two (2) years following the termination of this Agreement, the Employee agrees not to directly or indirectly engage in any business that competes with the Company within a [specific geographical area] and agrees not to solicit or attempt to solicit the Company's customers, clients, or employees."
Conclusion
A non-competition covenant is a critical tool for protecting a business's proprietary interests and ensuring that former employees or partners do not exploit their insider knowledge to benefit competitors. When drafting a non-compete clause, it’s important to balance protection with fairness, ensuring that the restrictions are reasonable in terms of time, location, and scope to avoid potential legal challenges. Businesses should carefully consider the necessity and enforceability of such covenants to ensure they are legally sound.
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.